Reply #43: A note on oil price elasticity

[Terry in Austin]

It's very quantifiable for the short term and mid term: -.07, according to Canadian Imperial Bank of Commerce chief economist Jeff Rubin. The minus means it's inelastic.

For the long term, to paraphrase a well-known economist, we'll all be dead. So we can indeed view substitution as a very limited proposition.

A repost from last year:

In response to price increases, demand for a given product will fall at a particular rate -- what's known as the "price elasticity" of the product. If it's fairly inelastic, it takes a large price increase to reduce the demand by even a small amount.

Oil products are very inelastic, it turns out.

A recent piece at the Oil Drum discusses this and cites a Congressional Budget Office report that puts elasticity for gasoline at -.06. This means it would take a 100% increase in price to reduce consumption by six percent.

The price elasticity for oil, according to another source, is -.07.

The the second link above is dead now, but the same article on Rubin's report can be found here.