Categorized | Economy

Why Is Gas Price Rising?

The high and rising gas prices are altering summer plans like nothing else. If you ask an average American about whats bothering him the most, it may or may not be Iraq and Hillary’s annoying laugh (now that she is no more in the race this issue would recede), but definitely the sky high gas prices and which show no sign of stopping.

Fareed Zakaria, the Indian born oracle with an impish grin, he is also the editor or Newsweek International and also hosts a show on CNN tries to answer some of these most vexing questions.

According to FZ, the basic reason is high and rising demand. This is what makes the high prices we face today different from previous episodes of high price.

In the past, prices rose because of restricted supply; OPEC basically slowed production to jack up prices. This time, it is rising demand, because of American gas guzzlers, but also China and India.

A demand-led price rise is actually more bearable. If prices are rising because economies are growing, it means that economies have the vigor and flexibility to handle increased prices by improving productivity.

This is why we have been able to have oil prices quintuple and not face a global recession.

Changing the forces of supply and demand requires long-term solutions, although it appears some of the current spike is a result of a speculative bubble. More important, high prices are finally making Americans use less gas.

If Americans use less gas, that will be the single biggest factor for reducing demand. Despite increased demand from China and India, it is still America that is the biggest consumer. Americans consume 23 million barrels of oil a day, compared with 2 million barrels per day for Indians.

If we use less, the price will come down.

The first thing the government should not do is cheap gimmicks like the gas tax holiday. The only solution is to use less oil.

This requires two things. First, raise fuel efficiency in cars so we consume less gas.

Second, investment in other energy options that are not petroleum-based. The good news is that even if the government is not investing enough in research, the market is now filling the vacuum and doing it.

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