The Oil Drum

(McKillop has been predicting, for some time, that higher oil prices, at least up to the $75 range, would not slow the economy.)

http://www.financialsense.com/editorials/mckillop/2006/0425.html
Whatever Happened to Oil Price Elasticity?
by Andrew McKillop
Author & Consultant
April 25, 2006

Excerpt:

Getting back to the narrow question of why oil demand (and world gas demand now growing at around 5%-per-year) are much less than unaffected by rising prices, but are directly increased by higher oil and gas prices, we finally call on facts. We can use theory first, but finally we call on facts, because scientific theory is based on and comes from facts. The other way round is called economics - that is, bending facts to fit brokenback theories.

Price elasticity of anything has an underlying notion, hard to quantify, of `satisfaction', and another of `substitution'. Neither of these have much place for the vast majority of oil and gas users. Nobody uses oil and gas `for the fun of it', or at least very few persons. Equally, the famous `hi-tech emerging new energy' substitutes and alternatives simply don't exist. They may exist on the Nasdaq or in people's heads and PCs, and in cute business video presentations, but not in the real economy.

So the simple fact that oil and gas demand is increasing much, much faster than during the cheap energy 1990s, with much, much higher oil and gas prices should at least allow us to accept reality, and find or develop theories that fit. When we go back to economic theory notions of `elasticity', as mentioned above, we soon see that they don't apply in large measure, or any convincing way to explaining what is happening. The bottom line is however very simple: until and unless interest rates are sharply raised, to double-digit annual rates, oil and gas prices can go on crawling ever up. With the ever surer approach of Peak Oil, they will in any case have no other direction to move.