So JT mentioned he would like to talk about gas prices, specifically them falling to around or under $2/gallon at some point this year. I assume it refers to something like this story. Consumer response to gas prices have been interesting. The traditional connection between oil prices and gas prices is one that most know. Individuals carpool, buy more fuel-efficient vehicles, use public transportation, or find other ways to avoid higher fuel prices in the long run.

Less discussed, at least by me on JT’s radio show, is the response of consumers to volatility in fuel prices. Sustained high prices clearly incentivize substitution by consumers, but so does volatility in those prices. Consumers do not like dealing with the constant up and down nature of prices. That impacts their budget constraint too.

Even during the last drop in gas prices car companies continued to sell higher fuel economy vehicles. People do not buy into sustained lower prices for fuel right now, because of the volatility over the last few years. Their response to the price swings, purchasing fuel-efficient cars, etc., help create this environment of lower fuel demand, and downward pressure on prices. More discussion on the radio at 9am central.

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