In California, pump prices of gasoline have gone up over 20 cents per gallon in just the past week. Analysts say a price of $5 per gallon, once unimaginable, is in clear sight by Memorial Day, the start of the traditional summer vacation driving season.
There’s a lot of useless and baseless presidential campaign rhetoric about the link between the administration’s energy policies and gas prices. Many people also hold very naive assumptions about the key determinants of gas prices: distance between the pump and the refinery, accidents and natural disasters, global terrorism, military conflicts, environmental regulations.
Of course, all of those factors do matter in determining gas prices, because they affect the cost of production. But even in sum, they’re almost marginal when compared with the most significant determinant of price.
Here’s the “secret” about the prices energy companies charge: there’s a demand curve for gasoline and it is very inelastic. No matter the price, within certain boundaries, Americans will consume a lot of gas. Profit-maximizing enterprises, like energy companies, will price at a level determined by consumer demand and willingness to pay. Rising gas prices indicate that enough consumers will buy enough gasoline at higher prices to ensure historic company profits.
And if that bothers you, don’t waste time complaining or, worse, pretending the answer lies in drilling more or easing environmental regulation.
The answer – the only answer – is to just stop buying.