As I write this, oil is trading at $112.12 a barrel, a new high. Inevitably, gasoline prices will rise, but will they hit $4.00 a gallon? Possibly, and if that happens, we’ll see a drop-off in demand, no doubt. It takes consumers a while to digest, adjust, and absorb the reality of $4.00 gasoline. They’ll carpool, ride the bus, shorten the vacation, or even stay home for a while. But if $4.00 a gallon is the “new reality,” eventually demand will rise again. People will simply purchase fewer discretionary items, which will, of course, not be a good thing for the economy as a whole, not to mention the fact that transportation cost increases will cause everything we buy to go up in price.
Meanwhile, the price of ethanol has come down, which is a very good thing. It encourages the oil companies to continue to blend ethanol into gasoline, which helps hold down the price a bit. Production of ethanol is up 6% over last year, with 13.8 billion gallons expected to be produced this year according to the Des Moines Register’s article of April 5, 2011, “As gas prices jump, demand could decline.”
One other item of interest was mentioned in the Des Moines Registers’ article, and that is that 35% of the nation’s corn is used to make ethanol. That’s a heck of a lot of corn that no one can eat. No wonder food prices are rising. Makes you wonder, doesn’t it?