So just how elastic *is* oil demand, anyway?

[jducoeur]

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...

Comments

[corwyn-ap.livejournal.com]

Oil demand is elastic enough that back in 2008 when it was $4.50 a gallon, it caused a drop in consumption enough to bring the price back to $2.50 or so.

On the other hand, any government change is going to want to keep their cash cow alive and functioning.

[fenicedautun.livejournal.com]

This. The biggest worries is not that production will be impacted, as most oil production in that region is already well guarded by the 3rd party companies in charge of the extraction (think Niger Delta, which has been seriously disrupted); and whoever is trying to take charge will attempt to keep those guards in place. Especially since none of the revolutionary movements so far have been talking about expropriation of assets.

More worrying are the transmission pipelines and ports for the tankers. The Economist did a review of that because of the Suez Canal, which is already in danger from Egypt, and they pinpointed 3 spots that were in danger in that area. But even with that, if we assume the disruption is short lived (<30 days), the US holds stocks of that much oil.

[mindways]

Oil demand is elastic enough that back in 2008 when it was $4.50 a gallon, it caused a drop in consumption enough to bring the price back to $2.50 or so.

No argument re: the elasticity - but the causality of that drop probably had a lot more to do with the timing (ie, the economic meltdown) than entities going "oh, gas is expensive" and cutting back on usage.[1] Not saying the latter wasn't a factor - it was certainly happening - but at least at the time, the prospect of global economic slowdown was cited as one of the major factors behind the precipitous decline in oil prices.[2]

[1] = Maybe also with a side order of "coming out of summer, when gas prices are higher", dunno.

[2] = Economic activity evidently correlates with oil usage - for reasons I can't articulate beyond "people are Doing More Stuff, much of which requires petroleum products", but it's taken as given in a wide variety of economic articles I've read.

[corwyn-ap.livejournal.com]

I rather think the timing of the economic meltdown had a lot to do with the price of oil. So there you go, circular.

[meiczyslaw.livejournal.com]

Sadly, I didn't save the link, but I remember the consumption of gasoline actually went up when the price rose, around 2%.

We Americans are weird.

[corwyn-ap.livejournal.com]

Depends on what time frame you are talking about. If one thinks one is in a high inflation period, then it makes sense to stockpile as much as one can. For most consumers that means a full tank. If everyone fills up when at 1/2 a tank rather than empty, that is another ~7.5 Million barrels.

[calygrey.livejournal.com]

1.53 is the lowest price I got it for. It was under 2$ for a little while.