So on my way home last night, I got a call from a friend telling me that some politician was on TV today telling everyone to be ready for gasoline prices to spike 13-cents per litre overnight. He advised me to get there before the price shock hits. My first reaction? Ignore him, of course. Not surprisingly, as I drove by gas stations on the way home, cars were lined up at the pumps onto the streets in a futile attempt to save some money.

Why futile? After all, $0.13 per litre on a 60 litre tank is $7.80 in hand, all else equal… unfortunately, the increase in demand does not make things equal. Simple economics (OK, not so simple to me, since I probably never got better than a C in Econ 101) suggests that this is in fact not true. The sudden supply scare causes prices to temporarily increase, while the demand shock (all of those folks spitefully not wanting to pay more, but also not willing to drive less) compounds effect of the price increase to create a longer lasting (permanent, in fact) effect on prices. Therefore, the outcome is that longer term prices will be higher. Its ugly, but its the truth.

Economic theory suggests that the best reaction to news like this is to ignore it, or even better, drive less. If ignored, the price spike will be temporary and return to pre-scare levels. For those who would rather take the $7.80 today and contribute to a demand spike that will accompany that immediate gain, will cause prices to be higher in the future. So as a result, the $7.80 saved today will eventually be spent on gasoline bought at even higher prices down the road (pun intended).

Remember, the best cure for higher prices, is higher prices!