High Gas Prices and the American Economy

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Automobiles are a big part of the American economy and because most people use them and depend on them to get from place to place, gas is also a necessity. Gas comes from oil which is a nonrenewable resource and is not abundant the United States. The U.S. gets most of its oil from the OPEC countries in the Middle East. When these gas prices increase, America suffers not only directly but indirectly as well.

In the summer of 2008, gas prices sky rocketed to an average of $4.09 per gallon of regular gas. During the summer season, gas prices usually go up some but not as drastically as this. The price of gasoline affects supply and demand in its usual ways. With the big increase in the price of gas people demand less since there is a negative relationship between quantity demanded and price. But elasticity also comes into play. On the other hand, suppliers tend to want to supply more since the price is higher and they can then get more profit from the high gas price. This is due to the positive relationship between quantity supplied and price.

Gas is an inelastic product which means that the quantity demanded is not affected as much by price unless there is a drastic change. In other words, no matter how high the price is, people still need gas to fuel their cars and will therefore continue to buy gasoline. This is why it’s possible for gas stations to raise their prices so much and still sell gas. People then have to turn to other alternatives. To help save money, they make lifestyle changes steering away from using their cars as frequently as normal. Instead, bicycles are used or a day is better scheduled to not make as many trips to and from home. Many people even trade in their bigger gas guzzling SUVs for smaller cars.

These high gas prices tend to affect small “mom and pop” businesses indirectly as well. My boss, Mike Look who owns Scott & Ellie’s Ice Cream Shop was affected. Even though ice cream and gas are not related, gasoline made an impact on revenue. When gas prices increased, he lost business because people avoided luxury items and leisure activities such as buying ice cream or going out to dinner in order to save money. So, though it was summer, Scott and Ellie’s actually lost a significant amount of money due to the high gas prices and this was true for other small businesses as well.

Gas prices also affect government spending. Public transportation that the government provides for consumers such as city buses, trash trucks, school buses, and mail trucks all use gas for fuel. When the government has to put more money in these public goods and services, it decreases the amount of money they can put into other important public goods such as education, roads, and national defense. Since transportation and gas are both inelastic, the government must decide what best action to take to prevent high gas prices affecting the economy so greatly. Oil is in high demand but it is a nonrenewable resource and will eventually be used up. Additionally, if the U.S. ever has major issues with the OPEC countries where most of its oil supply comes from, the U.S. economy could be in economic turmoil. The best possible solution is to find an alternate fuel source that will lower the demand for gas over a long term period of time or the problem will only continue to get worse.