Gasoline and Elasticity
Introduction
Recent happenings in the world have led to the economy of the world to fluctuate significantly. Some of these happenings are of a political nature, but yet strive to be economically significant. For example, the Brexit issues, the war in Syria, and the constant missile exercises by North Koreans have all affected the economies of their respective countries and their trade partners. These events have significantly affected the supply of Gasoline all over the world. As Price-Smith (2015) argues, political and economic issues tend to have a great effect on the supply of basic commodities in the world. Fuel is the most basic commodity in the world that has a significant effect on other sectors of the economy. The ability to travel depends on the supply of fuel, which makes business operations easy to run across vast geographical distances. However, the war in Syria has led to an increase in the prices of Gasoline in the United States (Price-Smith, 2015).
The increase in the price of gasoline per gallon has significantly increased in the last couple of years. This is true despite the fact that the United States boasts of holding natural gas reserves that can serve the population for a considerable amount of time. The increase of the strain on the relationships between the United States, in extension the western world, and Syria, Middle East, and other countries have brought about a deep economic crisis that can be felt significantly at the consumer level (Riley, 2014). The increase in the price of gasoline per gallon has, however, not made the demand go down. This paper strives to investigate why demand for gasoline will not go down amid constant fluctuation of the price of gasoline at significant margins.
Growing Demand for Oil
Gasoline consumption is mainly controlled by the automobile industry: The more people drive their cars, the more gasoline is consumed. In view of this, one would think that a sharp drop in prices of a gallon of gasoline will significantly affect the demand; this case is not true. What is true, however, is the fact that the price of gasoline does not significantly affect the demand for gasoline. One notion can only arrive at this point; the increase or decrease in the price of gasoline has no significant effect on the amount of automobile travel (Coglianese et al., 2017). This stands to show that the demand for gasoline is economic terms what is referred as inelastic.
Price Elasticity of Oil
From an economic point of view, price and demand are linked in a unique way. For instance, when the price of commodity increases, the obvious is for the demand to increase, vice versa is also true. However, for the case of Gasoline, as supply decreases worldwide, prices increase significantly, but the demand does not face significant change (Coglianese et al., 2017). Price elasticity is a measure of the responsiveness of demand for a given commodity amid significant changes in price (Cooper, 2003). Almost all prices elasticities are negative in nature. Therefore, an increase in price spikes a decrease in demand, and vice versa. Gasoline, however, is a significantly inelastic product (Baumeister, C., & Peersman, 2013).
The inelastic nature of gasoline comes in the sense that the changes in price have very little or no influence at all on demand. Amid all the political and economic issues in the world, demand for gasoline has not dwindled. In fact, the demand for such a commodity only rises with an increase in population as that is the only variable that tends to affect the demand significantly (Coglianese et al., 2017). This is true due to the fact that an increase in population leads to an increase in the market for gasoline and eventually an increase in demand, amid significant fluctuation in prices. The automobile travel is, therefore, even less elastic as compared to Gasoline (States Energy Information Administration, EIA, 2014). Nonetheless, economics shows that the change in the price of a commodity has a greater effect if the change persists over time, as opposed to being temporary changes in the prices. This incurs that temporary changes in price have short-term effects whose significance can sometimes be felt on a short-term basis.
Data shows that price inelasticity of gasoline is unchanging over the last few decades (Eitches & Crain, 2016). There is an expected change however in travel demand and fuel economy in the coming years. As expected, the prices of gasoline will keep the rising year in year out. Amid all the factors that ought to make the demand rise, that does not happen. Gasoline is uniquely an inelastic product. This unique nature can be displayed through a different set of economic events. For instance, between 2004 and 2014, the United States faced many economic challenges with the most significant one being the 2007/2008 economic recession (Eitches & Crain, 2016). A recession generally causes the expenditure and income for a given country to fall tremendously. The great change in the economic climate during the recession made the price of a gallon of gasoline to go up.
The decrease in income due to the recession, however, did not decrease expenditure on gasoline. It would be prudent to say since this data shows that the consumption of gasoline by US households did not change during the economic recession of 2007/2008. The steady consumption of gasoline depicts that households did not change their consumption amid a great increase in price (Coglianese et al., 2017). Instead of opting to consume less gasoline, people continued with their consumption habits. There is something about gasoline that is different from other goods to create the static consumer behavior witnessed.
Figure 1: Chart 1: Quarterly Household Expenditure for Gasoline and estimated Gallons of Gasoline Purchased (Source: Eitches & Crain, 2016).
Figure 1 illustrates the quarterly household expenditures for gasoline for a period of 11 years. The chart also shows the data for the number of estimated gallons consumed by households in the United States for a period of 11 years since 2004 to 2014 (Eitches & Crain, 2016). Figure 1 also shows that the change in the price of a gallon of gasoline throughout the years did not cause a significant change in the quarterly expenditure on gasoline for the same period.
In economics, the law of supply and demand is normally used to predict the change in demand when the price changes. This consumer behavior is a normal prediction for the given set of events. However, as shown in Figure 1, the demand for gasoline per household has not changed significantly over the past 11 years (Eitches & Crain, 2017). This good is, therefore, said to have a relatively inelastic price elasticity of demand. As such, when major political and economic events take place in the world to change the supply and, thus, the price of gasoline, the consumer demand for the good does not change negatively (Price-Smith, 2015). This is true because gasoline is good that is referred to as a necessity. Furthermore, gasoline has many uses for which it cannot be substituted by other goods. This can be illustrated through the great climate change issues that have been taking precedence over many issues in the world.
Pollution
Gasoline is said to be harmful to the environment. The use of gasoline to fuel automobiles has brought about the depletion of the Ozone layer due to the constant air pollution by automobiles. The depletion of the Ozone layer has, in turn, caused a lot of damage on the climatic situation globally (Bolaji & Huan, 2013). The effect has been witnessed through great climatic changes that have taken over the world news with changes in weather patterns that realty affects livelihoods of populations of the world. Energy summits have been arranged to discuss the way forward for stopping the negative effect of gasoline as a primary fuel. Since then, innovative ways to come up with fuel alternative has been brought to the table. However, amid all the detrimental effects of gasoline on the environment, consumers have not yet shifted to greener fuels. Thus, the demand for gasoline has not dropped as the product is still a necessity and its efficiency as fuel cannot be a matter of competition (Eitches & Crain, 2016).
Consumer Consumption Culture
There are indeed many reasons for a good to have a relatively inelastic price elasticity. One of these reasons can be that the good is a necessity. In the recent past, a variety of fuel alternatives have been created in an effort to curb the world’s overdependence on oil as primary fuel (Coglianese et al., 2017). These green fuels or energy efficient fuel alternatives have not yet matched up to the efficiency of Gasoline. This consumer behavior has been grounded because without any available substitutes, the demand for fuel oil has not changed. Thus, the good is a matter of necessity rather than preference, making a demand for the good remain relatively constant amid great changes in price and supply.
Another important factor to consider concerning the constant demand for gasoline is the culture of the population of the United States. In the United States, most people still prefer automobiles as their primary means of transport since it allows an aspect of privacy, the flexibility of time and place (Price-Smith, 2015). This preference has placed gasoline in a subclass of goods called necessity goods. In consideration of automobiles as a primary form of transport, the good has itself become a primary good to facilitate transport. This has over the years made the good a necessity for the functioning of our daily lives. In turn, this makes it difficult to reduce consumption of the good, even when the price becomes costly (Cooper, 2003). In view of the reasons mentioned above, gasoline can be said to be necessary to the daily functioning of lives and difficult to substitute. Considering these two reasons, the relatively inelastic demand for gasoline becomes possible.
Conclusion
Indeed, there have been many economic and political events that have structured the price of gasoline globally. The effect of the change in price has, however, proved not to affect the demand for the product. In retro view, the demand for the product ten years ago has not significantly changed up to now. The reasons for this can be summed up to be two. One, the product is considered a necessity and two, there is no other appropriate substitute to the product. It would be therefore prudent to conclude that gasoline, in the United States has a relatively inelastic price elasticity which translates to the situation in the whole world by extension.
References
Baumeister, C., & Peersman, G. (2013). The role of time‐varying price elasticities in accounting for volatility changes in the crude oil market. Journal of Applied Econometrics, 28(7), 1087-1109.
Bolaji, B. O., & Huan, Z. (2013). Ozone depletion and global warming: Case for the use of natural refrigerant–a review. Renewable and Sustainable Energy Reviews, 18, 49-54.
Coglianese, J., Davis, L. W., Kilian, L., & Stock, J. H. (2017). Anticipation, Tax Avoidance, and the Price Elasticity of Gasoline Demand. Journal of Applied Econometrics, 32(1), 1-15.
Cooper, J. C. (2003). Price elasticity of demand for crude oil: estimates for 23 countries. OPEC Energy review, 27(1), 1-8.
Eitches, E., & Crain, V. (2016, March). Using gasoline data to explain inelasticity: Beyond the Numbers. U.S. Bureau of Labor Statistics, 5(5). Retrieved from https://www.bls.gov/opub/btn/volume-5/using-gasoline-data-to-explain-inelasticity.htm
Price-Smith, A. T. (2015). Oil, illiberalism, and war: An analysis of energy and US foreign policy. Cambridge, Massachusetts: The MIT Press.
Riley, G. (2014). Oil crisis. New York, NY: AV2 by Weigl.
United States Energy Information Administration, EIA. (2014, December 15). Gasoline prices tend to have little effect on demand for car travel. EIA. Retrieved from https://www.eia.gov/todayinenergy/detail.php?id=19191.
