Price has little impact on demand

March 5, 2008 by Rob.

With oil at record highs and gas approaching $4, I was curious if climbing prices offset demand.  Based on my analysis, higher prices do NOT reduce our economy’s appetite for fuel.

I  found a very crisp chart that shows a 90 year trend of (inflation adjusted) gas prices.  It shows that prices have indeed recently spiked and that they are still not at record levels.

The I dug up a 25 year history of US oil consumption  and overlaid the graphs.   Sorry - I did not keep the graphs for your review.  The consumption graph is very close to a straight line with a consistent upward trend.  I was not able to visually correlate increases in price to decreases in demand.  Considering the recent spike, I had hoped expected to see noticeable decrease.

This is NOT normal economic behavior and leads me to conclude that either:

• we will tolerate more expensive gas because it’s been (artificially?)  under priced as per the cart above, or
• there are forces at play that prevent us from changing our buying behavior as prices rise

Perhaps, fuel prices are making a more drastic contribution our recent slow down that the “stagflation” data suggests.

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