Long and Short Term, Long and Short Term

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It can be slightly embarrassing reading Guardian leaders when the arts graduates try to do some economics. There's something of a temptation to photocopy a page or two from an introductory text book and post it to them. Today's pondering is upon the oil price:

There is a puzzle over oil prices - and it is not what is driving them up. That particular question can be answered quickly enough: demand for oil has increased, especially in booming China, and that lift to prices has been intensified by that old culprit, market speculation.

Got to get that market bashing in, of course. But this:

The real mystery, however, is this: why is expensive oil not changing the way we behave? Throughout this decade, economists have confidently predicted, and politicians have blithely assumed, that costly crude would lead to people consuming less and make greener energy cheaper - and therefore more popular - by comparison.

And the conclusion:

This market is not working as the economists and policy-makers have long assumed.

I think we've got said arts graduates arguing against the straw man in their heads rather than addressing what anybody informed has to say on the subject. That informed observer would say something like:

"Oil, and especially petrol, consumption is well known to be inelastic in the short term. (The technical definition is that a 10% change in price will change demand by less than 10%: if a 10% change in price leads to a greater than 10% change in demand then that's elastic.) For people live where they do, work where they do, drive the types of cars that they do. the shops are where they are and so on: as is granny's care home and the necessity of at least a weekly visit if young Tarquin and Jocasta are ever going to inherit enough to buy a flat of their own one day.

But in the longer term the demand for petrol is highly elastic with respect to price: as, in fact, is just about every other good and service. For cars do get replaced (not all that often in this writer's household, but still), jobs are changed, shopping patterns alter and people do move house. And when all of these things are done the higher price of petrol (and similarly oil itself with respect to flying off on holiday, using an oil heater etc, etc) will impact upon the decisions made.

It's simply that all of these things take time. Which is why we refer to the demand for oil being inelastic to price in the short term and highly elastic in the longer.

Something which, if our leader writers had paused for a moment to think, would have struck them as obvious. We in the UK have had higher real (ie, including the taxes levied) oil and petrol prices than those which apply in the US for some decades now. As the G's leader writers have had occasion to note, Americans also have higher consumption of oil and petrol, something which leads to their higher emissions per capita. For, you see, we Brits tend to live closer to where we work, shop closer to home, drive more fuel efficient cars and so on."

Because, umm, markets work exactly as advertised upon the tin. Higher prices restrain demand for an item, it just takes a little time, see?

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