Introduction In the past few years gasoline prices in the United States have increased substantially from around $1.10 per gallon in late 2001 (see Figure 1). Average gas prices first climbed above $2 per gallon in mid-2004, and then rose further past $3 per gallon in the wake of Hurricane Katrina in Sept. 2005. Figure 1: U.S. Average Retail Gas Prices, Jan. 2000 – Sept. 2005. Source: U.S. Energy Information Administration, http://www.eia.doe.gov/oil_gas/petroleum/data_publications/wrgp/mogas_history.htmlWhy have gas prices risen, and is the change temporary or permanent? This question raises issues both about the workings of markets and, more broadly, about environmental and resource economics issues. (See text Chapters 3, 12, and 13). Viewing the issue from a perspective of economic analysis, we can broadly classify these explanations into demand-side and supply-side factors. Let’s first consider a couple of demand-side explanations, then some supply-side issues. 1
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