Economics 101 and responsibility

The major story for the past several weeks has been the ever climbing price of gasoline in the USA.

To be sure, it is climbing to unprecedented levels in the US. But even $4.09 /gallon is cheap compared to many parts of the western world. In Italy, the locals pay Euro 1.57 per liter. That works out to something like $2.50 per liter, or $9.11 per gallon. To put this into perspective, I recently paid slightly over $32 to fill up the 5-gallon gas tank on my motorcycle!

But perhaps I digress.

Regardless of how much others pay for gas, Americans are feeling the pinch in their wallet. Those that have little in the way of discretionary income, are having to cut back in other areas to afford the gas they need to get to work, school, etc.

In Salt Lake City, a pair of "angry" kids protested, because their mother decided to cancel the Cable contract to save money for gas.

Whilst I applaud the kids for using democratic means to voice their opinion, it also shows that the mother missed a golden opportunity to teach her children basic economics, not to mention to reinforce the notion of responsible money management. She probably can't be blamed for the former, as like most Americans she is probably woefully undereducated about economics.

Gas prices have raised because of the simple principle of supply and demand. Simply put, demand has steadily increased globally while supply is constrained. Those that say that drilling in Alaska or offshore would have no effect are lying or naive. Increase supply, and cost will go down. And it will happen sooner than the ability to actually get any of that oil to market, as it will send the speculators out and cause others (OPEC, Venezuela, etc) to increase production now.

Of course, there are other parts of the equation, not the least of which is our woefully inadequate US refinery capacity, currently working at near 100% capacity. This needs to be increased with new refinery construction using the newest technologies. But the first and foremost thing that will help the prices we pay at the pump is increased output, and you only get that from more drilling.

True, you can attack the problem on the demand side, as well. And we should. Alternative sources of energy, conservation, etc... all will help on the demand side. But we must realize that demand is global, and while we may conserve and shift our sources of energy, other economies will continue to increase demand overall. So again, the best way to address this is to increase production.

Mrs. Vance missed this opportunity to teach her kids a basic truth. Rather, she was apparently happy to have them go out and "demonstrate", as if there is some power (government? big oil?) that can wave a magic wand and reduce the prices we all pay... for anything?

The other opportunity Mrs. Vance missed was in instilling in her children the notion of responsible income management. How great it would have been for Sadie and Pyper to participate in the budget discussion at the dinner table... to compare income with what they spend, and analyze just what was necessary, and what was discretionary. Then help the family to decide what to give up to save the required amount. Perhaps they would have come up with something different... eliminating the weekly pizza dinners, or reducing some other area of their lives. Maybe they would have agreed with the cable reduction, but if they were a part of the process, they would have not only better understood the situation, and had buy-in for the solution, but would have learned something very valuable as well.

There are no free rides, and in life we have to make decisions and compromises. Responsible people choose to pay for necessities first, and only then to buy those things that are nice to have, but not required.

CP