Manipulating the Demand Curve of Oil
Sources say when it comes to oil consumption, President Bush is pushing alternative technologies rather than calls to conserve because he doubts Americans can voluntarily curb their appetites. And I think he's right. It's folly to assume Americans will voluntarily restrict their car driving; instead, we need to change the equation for them. After all, the demand curve for gasoline is a fairly steep one, in that even big increases in the price of gas haven't led to less driving, nor have big decreases led to more driving.
What's happening now is that where the supply and demand curves intersect is at a quantity that is too high and is therefore socially suboptimal. What does that mean? The price of gas is too low, because it doesn't take into account such negative externalities as pollution and congestion, not the mention the geopolitical volatility and undeniable scarcity of this resource. What happens when the price of something is artificially low? The supply and demand curves meet too far to the right. Factoring in the true cost of a gallon of gas shifts the supply curve upward, which moves the equilibrium point up and to the left on the demand curve.
But because the demand curve for gas is so steep, even a huge increase in the price of gas won't yield the necessary reduction in the consumption of gas to get this equation right. And any sort of call to increase the cost of gas is akin to political suicide. So what's the solution? Again, Bush doubts voluntary curbing of gas consumption will work. Why would it? Why would you voluntarily decrease your consumption when you would rather purchase a certain amount for the price it's at now? Nothing has been done to your demand curve, after all.
Maybe these alternative technologies, scoffed as they are by some, hold the key to actually changing the demand curve, so that the resulting equilbrium is socially satisfactory, both in terms of Americans wanting to drive and Americans wanting to avoid pollution and congestion. Of course, things like ethanol and hydrogen-power vehicles have their own political triggers, too. So this dilemma is pretty darn hard to resolve. But I think understanding it starts with understanding the demand curve.
What's happening now is that where the supply and demand curves intersect is at a quantity that is too high and is therefore socially suboptimal. What does that mean? The price of gas is too low, because it doesn't take into account such negative externalities as pollution and congestion, not the mention the geopolitical volatility and undeniable scarcity of this resource. What happens when the price of something is artificially low? The supply and demand curves meet too far to the right. Factoring in the true cost of a gallon of gas shifts the supply curve upward, which moves the equilibrium point up and to the left on the demand curve.
But because the demand curve for gas is so steep, even a huge increase in the price of gas won't yield the necessary reduction in the consumption of gas to get this equation right. And any sort of call to increase the cost of gas is akin to political suicide. So what's the solution? Again, Bush doubts voluntary curbing of gas consumption will work. Why would it? Why would you voluntarily decrease your consumption when you would rather purchase a certain amount for the price it's at now? Nothing has been done to your demand curve, after all.
Maybe these alternative technologies, scoffed as they are by some, hold the key to actually changing the demand curve, so that the resulting equilbrium is socially satisfactory, both in terms of Americans wanting to drive and Americans wanting to avoid pollution and congestion. Of course, things like ethanol and hydrogen-power vehicles have their own political triggers, too. So this dilemma is pretty darn hard to resolve. But I think understanding it starts with understanding the demand curve.
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