First off, gas prices are high, but I’m willing to pay what is being charged because I have chosen to drive a decently fuel efficient car. The problem I have is with the economics of the price of fuel today. I believe there is a better way to ensure stability in the market for years to come. Here’s my reasoning — the Heney-nomics (the simplest language so that greatest number of people can understand):

FYI: All the stats are my own creation, based on my real-world experience.

In 2002 (10 years ago), the price of gas was around 75 cents/litre. Today though, we’re looking at prices around $1.20/litre and this is likely to go up in the hot summer months as the driving/traveling season gets underway. That’s an increase of over 60%.

Now, that’s all fine as long as the demand for fuel also increased proportionally (or if some outside factors affected the price… *cough* wars, bombings, etc). It can be said that there were several factors, other than demand, that could have played a role in the increase in fuel costs. Conflicts in the Middle East, hurricanes, regular maintenance to oil infrastructure, and inflation have all had an impact on the price of fuel.

When we look at demand in Canada and the USA though, we should be able to start seeing more calm increases to gas prices because of the increased fuel efficiency of vehicles. Are there more vehicles on the road now than in 2002? Very likely (again, no stats to refer to, just opinion and common sense). New vehicles are coming out with much greater fuel efficiency, which could in theory lead to a decrease in our demand for gas. In fact, if electric vehicles took off at all, we could see a significant thing happen in the relative short term… The demand may not decrease, but it could level off and increase at a much slower pace. If this happens (and no huge wars happen again for a few years), then we could see the price of gas decrease.

Is any of that likely to happen? Nope. The question though is why? Why can’t demand affect the price of gas in a significant way?

Demand is what drives supply. In simpler terms, if I want more of something, then there needs to be more of that something out there for me to buy. If I want less of something, then there ends up being more of that something available for others. The problem with this is that if oil reserves increased to ridiculous levels, the demand for it would likely increase as well because the price would likely decrease slightly. When I say slightly, I mean probably about 5 – 10 cents per litre at the pumps.

Can you imagine if the price of gas decreased 10 cents per litre overnight? Everyone with a vehicle and/or an extra gas can would line up at the gas stations and fill their tanks and containers to the brim, only to see the price go back up because they have increased the demand for fuel. An increase in demand means that prices need to increase so that the supply can catch back up with the demand.

It’s a never-ending cycle, only controlled by steadily increasing the cost so that demand doesn’t spike, nor does it decrease too much. By steadily increasing the price, consumers are given the false sense that prices are steady. Remember when gas was $1.00/litre? If it increased to $1.10 overnight, you’d lose your mind! However, a year or two later, $1.10 would look like quite the steal if it dropped overnight!

How do we fix the issue of gas prices? Fix gas prices. No really, fix the price of gas to a certain amount for a certain period of time. The government could fix the price of gas at $1.20/L for the year 2012. What does this do for the economy? Let’s say the price of oil drops significantly and the “real” price of gas drops below $1.20/L… the Canadian government makes more profits that it put towards infrastructure improvements and/or developing domestic resources and/or put it towards E-Stations for future electric vehicles, all while giving fuel companies a small profit “bonus”. What if the “real” price of gas increases above $1.20/L? Well the government could do a few different things, one of them being adjust the ratio of taxes to fuel company profits so that the government doesn’t have to adjust spending in other areas. Gas companies inevitably would lose profits, but we all know they make enough anyway and if the price decreases (which it probably would as it is in the best interest of the gas companies for it to go down), they would make a slightly greater profit.

Having a fixed cost for fixed period of time can be very beneficial to families and individuals alike. The rising cost of gas and the fluctuations it experiences do nothing but hurt the average person, even when the price decreases (because it will inevitably increase due to the increased demand).