Adjusting to oil price super spikes

The Independent carries a typically robust and vivid front page today reporting the view of a Gazprom executive who claimed that world oil prices could double from their current level to a peak in excess of $260 a barrel.

Spiky oil prices can move as far as they like, what matters is the trend in the cost of crude oil and how consumers and businesses around the world will adjust to the end of cheap oil and a new era of more expensive energy. Sean O’Grady writes that “Longer term there is every reason for optimism. Economies always adjust. The world is far less reliant on oil than it was in the 1970s. The high price will – again – call forth those traditional economic responses, substitution and increased supply.” (The rest of the article is here)

And the Telegraph reports today that British motorists are shunning their cars following record rises in the price of fuel with demand for fuel contracting by as much as 20 per cent over the past 12 months. It is an interesting article to consider when teaching about the price elasticity of demand for petrol and diesel - the market demand curve is likely to be highly non-linear with respect to the price. And perhaps it is expectations of future price levels and price movements that is prompting some of the fall in demand for fuel. People seem to be cutting down on their marginal journeys and perhaps taking heed of the wealth of advice on how to drive at speeds which increase fuel efficiency - hundreds of pounds can be saved every year by motorists who cut their speed especially on motorways.

We also have to isolate some of the other factors impacting on the total demand for fuel in Britain’s millions of passenger cars. Fewer firms are offering free parking to their employees, cost conscious shoppers are travelling less frequently to the supermarket and there are clear signs of a shift in consumer preferences away from the gas guzzlers towards more fuel-friendly vehicles. There are plenty of environmental up-sides to the soaring cost of crude!