Demand for Gas Down, But Just Barely Demand for gas has dropped only slightly since last year, despite the average gas price now hovering around $4 a gallon. Oil economist Philip Verleger says people are cutting back on driving in lots of little ways, but that significant lifestyle changes take time.
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Demand for Gas Down, But Just Barely

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Demand for Gas Down, But Just Barely

Demand for Gas Down, But Just Barely

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Memorial Day is ordinarily a weekend when a record number of Americans take to the road. Maybe not this year with the average gas price now hovering near $4 a gallon. Demand for gas has dropped since last year, though not a lot.

Philip Verleger is an economist who follows the oil market. He joins us from Aspen Public Radio in Aspen, Colorado. Mr. Verleger, thanks so much for being with us.

Mr. PHILIP VERLEGER (Economist, Aspen, Colorado): It is my pleasure. Thank you.

SIMON: Is there a psychological breaking point at which a lot of Americans will just say I'm not going to pay this. We're going to stay home this weekend.

Mr. VERLEGER: I think it's different for every American, but as gasoline prices rise and incomes stagnate, we're seeing more and more Americans try to cut back the use of their cars or switch to smaller cars just to save money.

SIMON: The demand for gas has fallen since last year, according to statistics, but not a lot. Is this a little bit like the lobster in the pot, you know, who doesn't know it's getting hotter? I mean, it seems to me I can remember economists saying at one point, well, Americans will never pay $3 a gallon.

Mr. VERLEGER: Most Americans aren't driving their cars just for the sake of driving them. They're driving them to go to the store, to go to work, to go to school, and it's a burden to change their lifestyle, but as prices increase, and for many Americans as incomes don't, they begin to change their lifestyle and make what are expensive changes. But they're gradual, so you don't see giant drops.

SIMON: So you might have people who will say well, it's Memorial Day. We'll take the kids somewhere, but they might make choices next week that would keep them out of their cars.

Mr. VERLEGER: Yes, that's exactly right. I mean, there's a story in the middle of May from the L.A. Times that traffic on the L.A. freeways is way down because so many people working in Los Angeles have made trade-offs either to carpool or to take mass transit.

SIMON: So those are some of the practical changes they make to try and afford the higher price of gas.

Mr. VERLEGER: That's right, and we've seen this in the United States. We've seen this in other countries. If they have two cars, they'll drive the more fuel-efficient vehicle to work. If they can, they will drive to a short distance where they can park and take a bus. They will try to find a way, say, where they can work four days and work at home one day, if they can.

The other things they will do is look at every activity to cut back on the use of gasoline. One of the things is driving slower. You use less gasoline when you drive slower.

So it's lots of little changes. Higher energy prices affect us not instantaneously but in all the small things we do.

SIMON: Do you expect to ever see gas at $3 a gallon again?

Mr. VERLEGER: Yes. In 1980, oil prices were (unintelligible), and prices were high, and everybody said they'd never fall. Well five years later, they were $10 a barrel. Commodity prices are very volatile, and if demand drops significantly and if refiners do many of the things they're planning to do, we could easily see $2-a-gallon gasoline within four or five years.

We're in the odd situation right now where there's crude oil sitting on ships off Iran that the Iranians can't sell. There's no shortage. It's heavy, and it doesn't make the products we need.

The problem today is we don't have enough what's called light, sweet, crude oil. Light, sweet, crude oil makes a lot of diesel fuel. The demand for diesel fuel is growing in China and across the world. Prices are high today because there has been a disruption to Nigerian supply and because the U.S. disrupted supply by putting light crude into the Strategic Petroleum Reserve. And that's taken prices from $80 to where they are today, $130 a barrel.

A year or two from now, the International Energy Agency and others state that the refineries will be in much better shape to supply diesel fuel, and so we could bring prices down significantly if the government would just do a swap of sweet crude, and it's got a lot of that in its Strategic Petroleum Reserve, for sour crude.

SIMON: Economist Philip Verleger speaking with us from the studios of Aspen Public Radio. Thanks so much.

Mr. VERLEGER: Well thank you.

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