Straight Economics

I exited out of my hotmail account today, and I saw a news item flashing in front of me on the msn webpage today stating Sales of Large SUVs Nosedive in the Month of September. I couldn’t help but finding myself grinning at this headline. It conjured up images of “soccer moms” piling grocery bags into the back of one of these behemoths, and running out of room. Not because they purchased enough food to feed an army, but because of the limited space available in the back of these “people movers”.

So basic economics will tell you that as the price of a good or service increases, the demand for will start to wane over a given period of time, before that time comes there will be a happy median where the producer of the (I’ll use the classic vernacular here) “widget” is getting top return on their items, before sales start to suffer.

So the time has come which these gas guzzlers are beginning to slow down, even through all the companies “employee pricing” options. So what is the reason behind the slumping numbers? Not because everyone suddenly realized just how wasteful some of these vehicles are, no – simple economics; the price of gasoline.

The popular reason for the increases has to be because of multiple hurricanes battering the oil refineries which populate the gulf coast. Katrina sent the message loud and clear, as the damage was incurred the prices shot up, and causing a public outcry at the price per gallon of self-serve gasoline. President Bush did his best to try and ease the high prices by dipping into the national reserves, but this is a “kludge” not a fix. Temporary relief at its best, until hurricane Rita comes along.

So the oil suppliers and refineries saw that the demand for gasoline was not waning, so it is now my contention that the price of gasoline will never drop below $2.50 per gallon again in the United States. The producers of the fuel have seen they can get away with these prices; the demand does not go away despite what many Americans call “bloated prices”, and the President is forced to try and maintain prices by tapping the nation’s reserves.

On the other side of the fence, the oil refineries took a blow to their producing capabilities, smaller supply of the goods yields higher prices for the goods if the demand is still intact. This may lead the general population to believe that prices will crawl back down to prices we had shortly before Katrina hit, I don’t expect that.

The refineries will be repaired, and the supply will meet the population’s demands, but the ultimate source of the stuff is not being replenished. You can hear politicians and pundits say “there is no oil shortage, we have not even reached half of what the earth has.” While the facts are this, we really have no “absolute gauge” to tell us precisely how many barrels are left in the ground. The pundits I just mentioned are correct, we have not hit the half way mark, but getting to these rich supplies is the trick.

At the present time there is no way to tap some of these oil reserves which remain in the earth, they are just unreachable. To reach these reserves if the time ever comes will cost money, the technology for these drilling practices will also cost money, and then maintaining the crew to execute the procedure will cost money, not to mention they will probably be out in the middle of the Pacific ocean away from their families and loved ones, and that too will ultimately cost the employer money. So the price to produce the oil and gasoline has now increased, and you simply can’t sell the items at a loss because that doesn’t make business sense in any way shape or form. Not to mention the outcry from investors in these companies when they start to fail, employees quitting because they aren’t being paid, and the national coming to a standstill because we haven’t developed a reliable alternative to gasoline yet.

So what was all this about, oh yea – the sagging numbers of large SUV sales, makes me scratch my head and say “I can’t figure that out”.