Kima Paper

INTRODUCTION

Americans have experienced a continuing escalation in gas prices over the past several years. As crude-oil prices climb to historic highs, steep gasoline prices and the weak economy are beginning to curb Americans' gas-guzzling ways (Campoy, 2008). There are several factors that affect the United States that tell us if the economy is strong or weak. Some of these factors include the rate at which Americans buy products, goods, and services. Government policies that are placed in American industries, technology, and the American environment all have an affect on the American economy. The strongest of these factors is the oil and gas industry, which with rising oil and gas prices, affect the American economy.

When there are large amounts of oil in the United States reserves, and an increase of active drilling for crude oil, the price of gas and oil start to fall. People are able to use more oil and gas as a result of its availability which helps keep the cost down on gas and oil. When oil and gas prices fall people can save more money on the cost of fuel. Therefore, consumers have more money to purchase other items, which in turn helps the economy. As a result of active drilling for crude oil by gas companies more job opportunities become available. With more job opportunities, more people have work in the United States which positively impacts the unemployment rate, and can lead to a higher national per capita income. "Per capita income is the total national income divided by the number of people in the nation." For years, it was not clear whether rising prices would ever cause Americans to use less gas. But a combination of record prices, the slowing economy and a tight credit market has beaten consumers down.

Current gasoline prices are likely to have a large impact on consumer spending but a much smaller impact on the consumer, an even smaller impact on the amount of gasoline purchased. Instead, the effect is likely to be felt in on other areas of spending (e.g., vacations, entertainment, electronics, or dining out) Perner (2008). Overall demand for gasoline in the United States is generally considered relatively inelastic (there a few substitutes for it). In fact, the only real substitute for gas would be public transportation, which is not always available. An individual consumer's demand for gasoline can be elastic or inelastic, depending on their access to a public transportation.

FACTUAL ANALYSIS

Many econometric studies of gasoline demand have been conducted over the years, particularly during the 1970s and early 1980s when fuel prices were high and concerns about energy conservation and security of supply were prominent (Dahl and Sterner, 1991a). Studies were motivated by interest in gasoline consumers' sensitivity to fuel price changes, for the insight this might give in explaining cross country differences in gas consumption and government revenue collections. Studies were also motivated by interest in the role of income in gasoline demand, and how expected increases in income over time would affect fuel consumption and automobiles use (Sterner, 1990). In the 1950s, gas prices in the United States were extremely cheap. Oil consumption grew at a rate of seven percent annually. The main reason for this was that the United States did not have to import oil from any other country, it was self-sufficient. The average price of gas was around $0.19 to $0.26 per gallon. Though it might seem really inexpensive, we have to take into consideration the pay scale and the value of a dollar in those days. Experts believe that today's gas prices, even with the recent rise, is the same, if not less than what people used to pay in the 1950s. In the 1970s the price of gas was between $0.36 to a little under $1. It never exceeded $1 even during the infamous 1970s oil crisis, the Vietnam War and the Watergate scandal. Though it was difficult to find gas during