Gasoline prices in the longer term

Goodbye, cruel fueGas prices. Every tick and twitch in them brings on tales of woe and wide-ranging armchair hunts for whom to blame — from faceless speculators to sitting presidents.

Sometimes, though, somebody will raise the idea that if you take inflation into account, the price of a gallon of gasoline has stayed about the same all along.

It’s true that there has been a baseline gasoline price that has held fairly steady since 1950, around $2.00 per gallon (in constant 2009 dollars).

There were two major exceptions, however — a rise lasting from 1973 to 1986 that topped out at $3.27 in 1981, and another from 2003 to present day, coming in at $3.48 for 2011 (all 2009 dollars, EIA data).

I would argue that the more recent rise directly correlates with the peak in world oil production, and so marks an end to the historical $2.00 baseline.

We’ve been on the “bumpy plateau” since 2005 and will probably see a period with a lot of price volatility, although generally trending upward. It’s just this sort of volatility that speculators look for, so the swings are more extreme than they might be otherwise.

This volatility may well continue for as long as oil supply stays fairly close to meeting demand — a cycle that goes from supply shortfall (relative to demand), followed by price increase, then demand decrease, followed by price decrease, then demand increase, which starts another round of supply shortfall, and so on.

Once production starts to decline noticeably, this roller coaster may straighten out, but on steady uphill climb. Demand will continue to outpace supply, and since demand for fuel is very inelastic, the necessary “demand destruction” will have to come from much higher prices.

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