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So just how elastic *is* oil demand, anyway?
The meme of the day seems to be that the news media have finally noticed that, what with revolution spreading across the Middle East, oil supplies might be threatened. Breathless reports along the lines of, "Oil might hit five dollars a gallon!" are all over. And I confess, my reaction is, "Only five dollars?"
The thing is, the laws of supply and demand are cruel taskmasters. When the issues are simple ones -- it costs more to produce X -- then a rise in those costs simply means that X costs that much more. But when the problem is that the supply of X is only so much, and we're already *using* all of it -- well, then, things get a lot more interesting.
So far, things haven't hit any of the *really* big oil-producing nations yet. But when folks talk about it possibly spreading to Saudi Arabia and the like, I get the feeling that they're engaging in wishful thinking when they talk about $5/gallon, because oil demand doesn't seem all that elastic. That is, demand slackens only fairly slowly when prices go up -- which means that, if supplies are suddenly cut, prices have to go up a *lot* before supply and demand equalize again. Of course, in the long run there's elasticity: lots of things *can* switch to processes other than oil, and it's likely that some countries can ramp their production up further. But it's a slow matter, ranging from months to decades depending on what you're talking about. In the short run, we just plain *depend* on a lot of oil, and prices are likely to stretch until some of those dependencies just plain give way.
Right now, things have spread to Libya -- something like 2% of world oil production according to the ever-reliable Wikipedia. Even that is enough to send speculative ripples through the supply chain. But Saudi Arabia? That's over 10% of world production. If political disruption takes that out, you've got *serious* competition for what's left -- competition that will send prices way up.
Mind, I'm just guessing here, and I'm only an armchair economist. (And I'm not passing judgement on the revolutionary movements, which are clearly well-intentioned and may well turn out quite well in at least some cases.) But prices have been rising for a while simply because of gradually increasing world demand, especially as China modernizes. Suddenly contract supply by that much, and it feels to me like *only* doubling the price of gasoline in the short run is kind of optimistic...
The thing is, the laws of supply and demand are cruel taskmasters. When the issues are simple ones -- it costs more to produce X -- then a rise in those costs simply means that X costs that much more. But when the problem is that the supply of X is only so much, and we're already *using* all of it -- well, then, things get a lot more interesting.
So far, things haven't hit any of the *really* big oil-producing nations yet. But when folks talk about it possibly spreading to Saudi Arabia and the like, I get the feeling that they're engaging in wishful thinking when they talk about $5/gallon, because oil demand doesn't seem all that elastic. That is, demand slackens only fairly slowly when prices go up -- which means that, if supplies are suddenly cut, prices have to go up a *lot* before supply and demand equalize again. Of course, in the long run there's elasticity: lots of things *can* switch to processes other than oil, and it's likely that some countries can ramp their production up further. But it's a slow matter, ranging from months to decades depending on what you're talking about. In the short run, we just plain *depend* on a lot of oil, and prices are likely to stretch until some of those dependencies just plain give way.
Right now, things have spread to Libya -- something like 2% of world oil production according to the ever-reliable Wikipedia. Even that is enough to send speculative ripples through the supply chain. But Saudi Arabia? That's over 10% of world production. If political disruption takes that out, you've got *serious* competition for what's left -- competition that will send prices way up.
Mind, I'm just guessing here, and I'm only an armchair economist. (And I'm not passing judgement on the revolutionary movements, which are clearly well-intentioned and may well turn out quite well in at least some cases.) But prices have been rising for a while simply because of gradually increasing world demand, especially as China modernizes. Suddenly contract supply by that much, and it feels to me like *only* doubling the price of gasoline in the short run is kind of optimistic...
no subject
On the other hand, as has been said revolutionaries are likely to want to get the oil infrastructure running again quickly.
With any luck, though, the instability, or potential instability, of the supply will encourage us to invest more in transitioning away from oil.
no subject
The threats to the oil supply since then, Iran, Iraq, the upheavals in the Niger Delta, and many many more, have led to nearly endless wars but not to major changes in American consumption patterns--or to a major migration to the alternative technologies.
Even electric cars require significant quantities of oil in their manufacturing process, not to mention oil-fired electrical plants to charge their batteries (which depend on rare-earth metals most of which come from China. . .).