Good Morning Gentle Readers,
Essentially the prevailing wisdom would have us believe that when it comes to fueling the American obsession with the automobile that we will pay the freight regardless of what it costs. Grumbling at the pump to be sure, but we'll dig deep to keep that flivver on the freeway. In the lingo that is referred to as inelastic demand, meaning that the upward movement of price has little to no effect on demand (consumption). As a refugee from the odd-even gas lines of the 1970's TWC will gladly pay extra for the convenience of rolling up to the pump and filling up, thus seeming to prove the economic illiterates correct. The reality is a bit different. Like most drivers, as the price rises I begin to change my driving behavior.
According to TWC's favorite economist, Lynne Kiesling (Knowledge Problem)....
...in the past two weeks, gasoline demand has plummeted, both relative to trend and relative to last year.
Retail price fluctuations had their predicted effect; they reduced consumption to cushion and absorb the unanticipated supply shock. How about that?
She cites James Hamilton's calculation illustrated in graph below to show how dramatic the reduced demand has been.
Professor Hamilton points out that this decrease in demand is one of the reasons why futures prices have returned to pre-Katrina levels, and why the storm hasn't had more of a prolonged effect on prices.
Chart courtesy of Professor James Hamilton at Econbrowser
tip of the glass to Lynne Kiesling at Knowledge Problem
techonorati tag gasoline prices