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Guarding Your Wealth for Senior Citizens
How to Lower the Price of Gasoline Back to $1.25
Supply and demand law is why the ‘simple solution’ to
reducing the price can’t work
By Jeffrey D. Voudrie, CFP
April 30, 2007 - Gas prices seem near all-time
highs and the summer driving season hasn’t even started yet! A recent
email presented a simple solution that will force gas prices back to the
$1.25 a gallon range. Read on for details and to learn basic principals
that may make investing more profitable.
Have you ever received one of those ‘chain’
emails—the kind where you are supposed to forward it to 10 of your
friends? My wife received one this morning. The email contained the
simple solution to the gas crisis. Supposedly, the solution was created
by a high-level executive at a major U.S. corporation and an engineer
that worked for an oil services firm. These guys should know their
stuff, right? Wrong.
The solution proposed was that we should all decide
to stop buying gas from ExxonMobil. If we stopped buying gas from them
then they would be forced to lower gasoline prices to tempt us to buy
from them again. The email said that we consumers need to teach the Big
Boys that we are in charge, not them.
The Laws of Supply and Demand, the basis for
capitalism, are taught in Economics 101. The law says that the market
price of a good or service will be determined based on how much of it is
available and how much buyers are willing to spend for it. This
principle is one of the underlying reasons that bond, real estate and
stock prices move up and down.
Let’s look at salt as an example. In centuries
past, salt was hard to come by and many people needed it. At one time it
was so valuable, it was worth its weight in gold.
That’s not the case nowadays. Salt is very
inexpensive. The container it’s sold in probably cost more than the salt
inside it. Why? Because the supply of salt is high and the demand for it
is low. Salt is easily mined in vast quantities. Also, refrigeration and
the use of other preservatives drastically cut demand.
This supply and demand law is the reason the
‘simple solution’ to reducing the price of gasoline can’t work. First,
gasoline is a commodity product with a limited supply. If you only
switch the outlet from which you purchase gasoline, you aren’t reducing
the demand. The same amount of gasoline will be sold, keeping demand,
and therefore the market price, level. It may hurt ExxonMobil but will
help someone else.
Reducing the price of gasoline by decreasing demand
will require that people use less gasoline. That means we need to
carpool, ride bicycles, walk or drive more fuel-efficient vehicles. In
the last year or so we’ve seen that demand remains strong even when
prices rise by a dollar or more. So demand probably won’t change until
prices are much higher than they are today.
Second, the simple demand solution doesn’t take
into account the fact that there is a global market for oil. Gasoline is
produced by refining oil. ExxonMobil doesn’t set the price of oil, the
market does. Even if demand is reduced in America, the demand elsewhere
continues to increase. The demand in China and India is growing so
rapidly that prices will go up even if we cut back here in America.
Third, the supply of oil must be factored into the
equation. There hasn’t been a discovery of a major oil-field in decades.
The amount of oil pumped from an oil-field doesn’t stay the same. It
will naturally decrease over time. There have been improvements made in
getting the oil out of the ground, but overall, the number of barrels a
day pumped is declining. For instance, did you know that the production
of OPEC is lower today than it was in 2005?
So this ‘simple solution’ obviously won’t work. I
believe that there is little we can do in the United States to
significantly lower the price of oil. There simply isn’t enough oil to
meet the needs of the world economy. Understanding that affects how I
manage my clients’ portfolios.
As an investor, understanding the Laws of Supply
and Demand will help you select where you should invest. Avoiding
industries where supply is increasing faster than demand will reduce
your losses. Investing in industries where demand is growing faster than
supply can increase your profits.
If you have a specific question or would like more
information, give me a call toll-free at 1-877-827-1463 or you can also reach me by email at
jeff@guardingyourwealth.com.
I will answer your financial question FREE.
About Guarding Your Wealth:
“Guarding Your Wealth” is a
nationally syndicated weekly personal finance column written by Jeffrey
D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group,
a private wealth management firm that employs sophisticated proprietary
strategies designed to protect and grow its clients' investments. Visit his website,
www.guardingyourwealth.com to read past articles under the Guarding
Your Wealth Article Archive that may not have appeared in
SeniorJournal.com.
Guarding Your Wealth for Seniors, on
SeniorJournal.com, is
a collection of columns by Voudrie that deal with issues of particular
interest to senior citizens.
Click here
for all columns.
In addition to being a nationally
syndicated columnist and Certified Financial Planning Practitioner, Mr.
Voudrie provides personal, private money management services to select
private clients
nationwide.
Looking for an energetic expert who
is passionate about financial and wealth management? Mr. Voudrie is an
excellent speaker who will excite and inspire your audience. Mr. Voudrie
is available for a limited number of speaking engagements, television
appearances and radio talk shows. For bookings, email
jeff@guardingyourwealth.com.
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