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October 10, 2008

Why did gas prices spike?

For the past several weeks, drivers have been enjoying falling gas prices, and then, bam, Hurricane Ike hit, and prices jumped to levels we've never seen. What happened?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Actually, this is fairly simple to explain. The hurricane hit some of the platforms and refineries in the Gulf of Mexico. We in the Southeast get a lot of our gas from that area. There's a pipeline that comes up from the Gulf of Mexico to the Southeast. So the supply of gas was disrupted, supplies were down. Now nothing changed the demand for gas, how much gas we wanted to buy. So the problem you had was, you had a much smaller amount of gas to be sold to a much larger demand, and in that situation, Economics 101 would say the price has to go up. If the price could not go up, what would have happened is those limited supplies would have been used up in a matter of days, perhaps hours. If nothing else, people would have said, 'Hey, supplies are disrupted, we may not have any gas for a couple of days. Let's go buy gas even if we don't need it.' So this is an area where I think most people don't understand the function of price. People look at price and say, 'Well, that gives the producer profits.' Yes, that's true. But in this case the higher price allowed us to preserve that limited amount of gas over a longer period of time because it caused drivers, you and me, to reduce what we wanted to buy."

Posted by Dave at October 10, 2008 08:00 AM