Saturday, April 23, 2011

Word of the Day: Elasticity...

I often think I understand price elasticity because I used to sometime back in the Dawn of Time.  But a refresher is not a bad idea, especially when the subject is oil:

"Price elasticity" is a measure of how people react to rising prices. A high number means they cut back sharply when prices rise. A low number means they just suck it up and keep buying.So what's the elasticity of oil prices? This is important, because it tells us, for example, how people are likely to react to higher taxes on gasoline. Will they use less and find other ways to get around? Or is it damn the torpedoes, keep burning the stuff, and figure out other places to cut back? [More]
So how do we react to oil prices. Hardly at all.
If these numbers are right, they're pretty stunning. Even in the rich world, it apparently takes massive price increases to significantly reduce the demand for oil, even over a 20-year horizon. In the developing world, forget it. As long as incomes are going up, demand will go up. Urk. [Same - also: the figures]
I was equally surprised, but my thinking was clouded by the effects of the recession that followed the last oil spike. We did cut back consumption, but it obviously was not driving to jobs we had been laid off from, not a reaction to prices.

This insensitivity - the gotta-have-it nature of gasoline - perhaps explains why presidential political fortunes are so impacted by pump prices.

What is forgotten is that rising gas prices have been one of the most consistent threads of the Obama administration. The average retail price when he took office was $1.61 a gallon. A year later, it was $2.61. Now, it's $3.86 -- an increase of 140 percent under Obama.
Obama's policies haven't had much to do with the increase. But if gas is still this dear come November 2012, he's the one who'll get the blame. [More]
In fact, the recovery here and around the world could perversely be bad news for Democrats. We have essentially lost empathy for the unemployed (unless they are we), so gas (and food) prices will be major factors in how we evaluate how we're doing. I'll bet even the deficit won't poll as high.
Besides on the deficit front, it's becoming pretty obvious we won't stand for the cuts we need to make.

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