Correct the Journalist

I found this article from March 2008, in which business writer John Wilen writes:

Q: If people are driving less, why do gas prices keep rising?
A: People are indeed driving less. Gas consumption has fallen about 1 percent since late January.
Yet, gas prices are on the rise. Gas has averaged more than $3 a gallon for four straight months and, more recently, has surged into record territory. Estimates of how high gas prices will go this year vary from $3.50 a gallon to $4. But virtually everyone agrees prices have higher to go before they fall.
This disconnect between demand and price may seem to violate fundamental rules of economics, but gas prices are actually responding to demand of a different kind: From investors.
...
Unfortunately, consumers pay for this investment frenzy in the form of higher pump prices. And despite mounting evidence that Americans are cutting back on their gasoline habit — and may cut back even more drastically as gas gets more expensive — it may be some time before prices start responding to lower demand.

His explanation regarding speculation is correct as far as one possibility goes, but there is an error in the last paragraph, and 3 other possible supply and demand explanations for why the relationship (price going up and quantity going down) is being observed.

Identify the error and the 3 possibilities. The answer is in the comments.

Spot the Error in Supply and Demand Logic

Pick out the error presented in this CNN article covering a study given to Congress, the answer is in the comments.

According to the study, investors poured $60 billion into oil futures markets during the first six months of the year as oil prices soared from $95 to $145 a barrel. Since then, investors have withdrawn $39 billion from those same markets as prices have retreated.

Michael Masters of Masters Capital Management, which did the study, said the flow of money - not major changes in supply and demand - caused the volatile movement of oil prices. The report was released Wednesday by Senate and House sponsors of bills to put additional curbs on oil market speculation.

Camels and Gas

As oil (and gas) prices rise, those in India are switching to camels instead of driving their cars:

“It’s excellent for the camel population if the price of oil continues to go up because demand for camels will also go up,” says Ilse Köhler-Rollefson of the League for Pastoral Peoples and Endogenous Livestock Development. “Two years ago, a camel cost little more than a goat, which is nothing. The price has since trebled.”

The economics of it then...how does a increase in the price of oil lead to an increase in the price of camels?

1. The price of oil increases.
2. Oil is a complement good for cars.
3. Demand for cars falls, putting downward pressure on car prices.
4. The falling car prices do not offset the rising cost of driving the car.
5. There is an increase in demand for substitute means of transportation, including camels.
6. The price of camels increases.

Hat Tip: Kids Prefer Cheese.

Gas is Still Cheap

For those of you upset about the news of retail gas hitting the highest real (meaning adjusted for inflation) price in history, be comforted by the fact that it is still historically cheap. Daily prices have large fluctuations, so it is best to just look at annual averages, in which case 2007 gas was still cheaper than it was when the government started collecting this data...in 1919! Consider the graph on the left here based on data from the EIA. The blue line adjusts the prices to the price if you were buying it with 2007 money, while the red line is what you would see posted on the signs at that time.

Of course, this is just the price and it does not account for the improved quality of gas, greater access to stations, improvements in fuel efficiency, etc all of which make gas functionally cheaper to us. More importantly though, it does not show us how much of our budget gasoline takes up. Let us frame the question this way: For an average person living in the U.S., what percentage of their budget would purchasing 1,000 gallons of gas take? Check it out:

The measure of income is per capita personal income available from the BEA. Is it any wonder why most people are not changing their behavior in any significant way to accommodate higher gas prices? Bitching is free, so of course they are doing lots of that.