Demand destruction has its limits ?
Oil's up above $130, and the mainstream media is starting to get worried:
One theory is that, as the price increases, we'll reach a pain point where demand will reduce sufficiently to drop the price. This assumes two things:
- Oil demand is completely price-elastic. This implies that oil is a non-essential good that people will simply do without when it gets too expensive, like going to the movies.
- Less of an economic assumption, more of an article of faith, the supply of oil is capable of steadily increasing, it's just that our rate of increase of demand is too high. This sudden acceleration in demand is being caused by China and India, the punters say. What are they suggesting, then ? That we ask China and India to use less ? A lot less than us ? I can just hear the reaction to that ...
The problem with oil is that it is not a non-essential good. We may be able to curtail some of our discretionary travel, combine trips, car pool, etc., but transport energy is just one of the uses of oil. The primary use that we simply cannot cut back on is food production. The other problem with simply cutting back our demand to a previous level is that supply is not simply going to stop increasing - it's going to start rapidly decreasing. So, rather than the solution to the problem of high oil prices being a one-off exercise in reducing consumption, we need to develop a culture of reducing consumption every year.
So, picture a scenario where we helpfully turn our lightbulbs off for an hour and instead of getting a pat on the head and returning to business as usual, we just get asked to save more energy, and keep on doing it - forever.