Enough Is Enough Fuel Cost And Aa Layoffs

[The Drunken Duck]

If there is a demand, and that demand is what is creating these high prices then lets slow down the demand and move to alternative energy sources or use less fuel period. Sure it isnt that easy, but what I am afraid of is this....If I go by a hybrid and I suddenly start getting 55 mpg and my neighbors see that my car has power, comfort, roominess, and they all go and buy one. What is to stop the CARTEL (kinda mobbish isnt it) from just adjusting prices to match demand?

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Well, your question is somewhat complex. First, higher prices are a signal that demand and supply are reaching an imbalance. They do tend to result in less use, but in the energy market, this usually takes time. People don't immediately go out a buy a replacement car, the tend to wait until their next purchase and at that time, some take the price of fuel into consideration. Look at Europe, they have high gas prices and people adjust car purchases accordingly (though they also tend to purchase small cars because of the structural nature of urbanization in Europe).

Second, although gas prices appear high now, on a purchasing power adjusted basis, they are still about 30% lower than they were in the early 1980's. That's why many industries are absorbing the price increase. Airlines never really adjusted. The low jet fuel prices in the 90's helped them absorb higher labor costs and mask operational inefficiencies.

As for your question about adjusting prices to meet demand, that's not as easy as it may sound. First, OPEC doesn't control a dominate share of oil production. Russia, Mexico, Canada, the US, Norway, the UK,... aren't part of it. Second, its a fragmented production market so its very hard to coordinate. The transaction costs of coordination are very high. When there is excess capacity in the market, OPEC producers have a strong incentive to cheat. Just look what happened to oil prices in the 1990's. Oil tanked to about 12 / barrell. Finally, OPEC has an incentive to keep prices below the level that incentivizes countries to build alternative fuel infrastructures. If oil stays above 50 / barrell for several years, there will be a lot of private capital going into alternative fuel because Hydrogen and Battery powered vehicles become economical. That would be bad for OPEC because once the alternative market reaches a tipping point, the demand for oil would drop massively.