Brief fuel economics:
The big problem with fuel is that both the supply AND the demand are fairly inelastic in the short term.
Supply:
Producers can theoretically pump more or less but as a practical matter their major cost I'd the initial fixed cost of drilling the well and setting up the infrastructure (pumps, tanks, etc). Their marginal cost is practically zero because they don't pay for the oil they pump. Consequently, even if they are selling at a loss (considering their initial investment), they are much better off to sell at a loss than to not sell and lose even more.
Increasing supply takes months or years. You can't just spontaneously wish an oil well into existence the day the price of crude hits your break-even price. Offshore oil rigs obviously take even longer so while price increases do cause production to increase, there is a long lead time.
Demand:
When the price of gas increases we (consumers) have only a limited ability to cut use in the short-term.
In the long term we can do things like:
- Trade the Suburan for an Equinox
- Trade the Equinox for a Prius
- Trade the Prius for a Tesla
- Move closer to work
- Etc
In the short-term we are generally stuck. We have to go to work and the only way to get there (for most of us) is whatever car is IN the garage. We can't just wave a wand and convert our gas-guzzling Suburban into and Equinox, Prius, or Tesla.
