Thursday, April 17, 2008

Think Of It As An Incentive to Walk

Gas prices will continue to rise so long as customers continue to buy

Drivers everywhere in the country are getting mad as hell... and they're probably going to keep on taking it.

Fuel prices in Montreal hit 129.9 cents a litre -- an infantesimal amount short of $1.30 -- yesterday, and CIBC figures it's not going to come back down anytime soon.

"My feeling is that oil prices are probably going to rise for the foreseeable future. Generally speaking, gasoline prices are going to track oil prices higher," said CIBC World Markets economist Jeff Rubin. "People should get used to the idea of $1.50 a litre gas."

"The major factor is, of course, the cost of crude," says Roger McKnight, a senior anaylst at Oshawa, Ontario's En-Pro consulting. "A year ago, the cost of crude was about $65 a barrel. Today it's about $114 a barrel. If the price of your feedstock goes up close to 50 per cent, then the price coming out of the end of the pump ... would expect to reflect that increase."

"Right now gasoline is quite a bargain," McKnight said. "When you look at the differential in the crude costs - you haven't seen anything yet."

Of course, one of the biggest factors in crude oil pricing is demand. And so long as we continue to live in a society where we deem it acceptable to do things like drive to the 7 11 for a pack of cigarettes, we aren't doing ourselves any favours in terms of gas prices.

Gas prices -- generally considered to be price inelastic (which indicates that demand is largely unresponsive to price) -- will only continue to rise so long as a market willing to pay the price for it exists. And while many people certainly don't have the option of walking or busing everywhere, the exorbitant price of gasoline could be considered an incentive for those who can, and an incentive for those who need to commute to work to at least start fuelling more of their casual travelings with two feet and a hearbeat.

The point is that while most people don't have an immediately available substitute for gasoline to fuel their vehicles, they do have an immediately available substitute for their cars -- at least for short-distance travelling.

It could significantly reduce demand for gasoline, increase the price elasticity of that commodity, and provide producers with an incentive to keep the prices lower wherever possible (and considering that production costs remain largely static despite the higher market price of oil, an incentive is what's needed here).

Most importantly, walking a little more will also pay dividends in terms of local air quality and health.

So think of the higher fuel prices as an incentive to do something our society should have been doing for the last thirty years: namely, a lot more walking and biking.

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