The Oil Drum

253 comments on DrumBeat: June 20, 2007

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Gilgamesh on June 20, 2007 - 3:15pm

I would like to point out something I learned in economics.

Inelastic supply and inelastic demand make for very high price swings. As neither the consumer or the supplier has real control price goes all over the place.

Suppliers, once the oil is tapped, it is coming out. Standard oil knew this and used it to bankrupt many other oil companies.

Consumers, once you build up your life around oil, when it goes you are screwed.

This is what gave OPEC power, being able to control supply, and therefore prices very keenly. Hopefully now oil is more elastic than before. (even though i have seen articles saying its more inelastic.)

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WNC Observer on June 20, 2007 - 3:38pm

The conventional wisdom is that oil demand is highly inelastic, but I wonder to what extent that is really true. A huge amount of what we use oil for directly or indirectly really falls into what could be classified as discretionary rather than indiscretionary expenditures.

My guess is that most people SAY they cannot and will not cut back regardless of price, but if the price actually did go high enough, they would indeed cut back their consumption, albeit while complaining to high heaven.

For example, all that commuter mileage is supposedly inelastic demand. However, if prices got high enough, or rationing were imposed, people would start carpooling. They did it in WWII, they did it in the late 70s, so they would do it again -- if fuel prices were high enough to provide enough inventive to do so.

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Aniya on June 20, 2007 - 8:44pm

HI WNC,

Thanks for your comment, and let's hope there's some room to lower consumption (i.e., relatively painlessly).

re: "...what could be classified as discretionary rather than indiscretionary expenditures."

Q: Is it not the case, though, that we begin to see a problem when the providers of "discretionary" services/products (or, we might call these folks, "recipients of discretionary dollars") do not receive the income they "need" (ie., rely upon) for their livlihoods (i.e., necessities) - ? (question mark?)

That said, I like your suggestion of things people might do when the prices get high enough.

Q: Will this be enough to offset the loss?

Q: What about as the supply declines and the decline continues on...?

Q: Do you see any way to bring about these "elastic" changes now, in an effort to use the energy we have for preparing for future/alternative sources, or etc.?

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WNC Observer on June 20, 2007 - 11:02pm

Q: Is it not the case, though, that we begin to see a problem when the providers of "discretionary" services/products (or, we might call these folks, "recipients of discretionary dollars") do not receive the income they "need" (ie., rely upon) for their livlihoods (i.e., necessities) - ?

Yes, there will be a lot of jobs that will be made redundant. That is why WT says in his ELP plan "Get thee to the non-discretionary side of the economy."

Q: Will this be enough to offset the loss?

Supply and demand will adjust to each other to stay in equilibrium, albeit a constantly changing equilibrium. Shrinkage and elimination of the discretionary side of the economy will obviously be a big part of it. I suspect that our definition of discretionary and non-discretionary, luxury and essential will change with time.

Q: What about as the supply declines and the decline continues on...?

See above. While some of our past experiences (Great Depression, WWII, 70s Energy Crisis) offer some useful lessons and templates, this time around things will be different. In the Great Depression, there was a 3 1/2 year economic collapse, and then the slow recovery; WWII lasted a few years and then was over; The energy crisis lasted a few years, and then the spigots were opened and oil prices plunged. This time, energy price increases will just keep going up and up and up for decade after decade, without relief. There are not many precedents for such a long term, unrelenting crisis.

Q: Do you see any way to bring about these "elastic" changes now, in an effort to use the energy we have for preparing for future/alternative sources, or etc.?

Individuals can always make their own lifestyle choices. Anything society wide is going to have to take a massive government intervention. I'm not so pessimistic as to think that nothing will be done, but I am realistic enough to recognize that what is done will mostly be too little, too late, and sometimes not even the right thing.