The Oil Drum

107 comments on a linear extrapolation of oil consumption by demand growth, production growth, and demand elasticity

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louGrinzo on January 22, 2006 - 10:08am

Bingo, JD.

I would add to your comments that any talk of the price elasticity of oil demand has to be extremely specific in terms of three things, two of which are very hard, if not impossible, to model:

The easy one is the size of the price increase. The demand response will be non-linear with respect to the price change (hence the fact that they're demand curves and not straight lines). Over a pretty broad range, the larger the increase the ever larger the non-linear demand response.

The timing of the price increase and the demand response. If price creeps up over several months, people will adjust much more slowly and less in absolute terms than if the same percentage price increase happens in a week.

Market psychology. After the hurricanes we had a lot of very spooked drivers in the US. People were scared that they wouldn't have gasoline to get to work or the food market. Just as people started to get serious about minimizing their fuel use, prices came back down.

I'd also toss in a reminder that we simply don't know how people will react to truly high prices in the US. The price level in 1981 and 2005 were, adjusted for inflation, almost identical. But we still haven't seen what the US consumers will do when faced with months of gasoline prices above $5/gallon. (That price, in 2006 dollars, is my personal, seat-of-the-pants level for the lower bound of genuinely high gasoline prices.) IMO, at that price level we're deep into unchartered waters, and we could very well see a level of commitment to conservation rivaling or even surpassing anything the US did in WW II.

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LevinK on January 22, 2006 - 2:14pm

Let's see... an average driver goes 12K miles per year, which with 20 miles/gallon realistic fuel consumption is 600 gallons or about $1500 at current prices annualy. How much is this? 4-5% of the average income? In my home country people spend twice the same share for mass transit only, while owning a car would eat maybe 20%-30% of it. But people are still driving because you know that's what civilisation is all about...

IMO demand reduction in US will not come through high prices but through shortages. All things being equal people will continue driving even with 10$ gallon because there is simply no real alternative. Yes they will drive less but not that less than you think now.

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Gets IT on January 22, 2006 - 7:10pm

Amazing right Levin? When I was living in Houston, Tx, I ALWAYS drove MINIMUM 30,000 miles/year as long as I could find the gasoline. The OPEC 1976 crisis was the only thing that ever slowed that down. Couldn't get it for several days at a time and 4-5 hour wait in line. If I could fill the tank, I was movin' that Jeep 4WD Pickup and pulling a boat 175 miles 1-way each weekend to the fishin' hole. Most expensive fish I ever caught. I think they came in at about $40/lb when I caught fish. Sometimes that fish price hit infinity. Now, I live within 1km of the ocean, drive around 12,000 Kilometers each year. Price of gas got higher, price of fish went down, but now I can work and fish every day. No complaints here.