Fuel Protests, 15°

What do you think should/will be the outcome of the fuel protests breaking out globally?

see: http://www.celsias.com/2008/06/12/fuel-protests...

14 replies

Charles M. 110°

Mickey D: When an oil company sells oil to itself it does not incur a loss because it passes those artificially stimulated costs on to the end user. As you would have noticed, you're paying more for gas.

Written in July 2008

Ok. I don't run oil companies, and there is probably a good reason for that, but if selling oil to yourself causes you artificially stimulate costs, and then you pass it on to the consumer, and they then sell their hummer to replace it with a bicycle, then haven't you just reduced your demand by raising prices?

Written in July 2008

Charles M. 110°

Mickey D: Yes, obviously any pricing policy that kills demand for your product is doomed to failure. However you need to consider something called price elasticity of demand (

Price elasticity of demand (PED or Ed) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price (ceteris paribus, i.e. holding constant all the other determinants of demand, such as income). It was devised by Alfred Marshall.


Price elasticities are almost always negative, although analysts tend to ignore the sign even though this can lead to ambiguity. Only goods which do not conform to the law of demand, such as Veblen and Giffen goods, have a positive PED. In general, the demand for a good is said to be inelastic (or relatively inelastic) when the PED is less than one (in absolute value): that is, changes in price have a relatively small effect on the quantity of the good demanded. The demand for a good is said to be elastic (or relatively elastic) when its PED is greater than one (in absolute value): that is, changes in price have a relatively large effect on the quantity of a good demanded.


Revenue is maximized when price is set so that the PED is exactly one. The PED of a good can also be used to predict the incidence (or "burden") of a tax on that good. Various research methods are used to determine price elasticity, including test markets, analysis of historical sales data and conjoint analysis.

.)

Depending where you are on the price elasticity graph, increasing price might not significantly impact the amount you sell.

Or in other words, the measure of how price changes affect buying behavior.

Consider if gas was 5c per gallon. You'd use a lot and would not moderate your consumption because of price. If the price went to 20c (ie x4) that would be unlikely to change your buying habits. However, quadrupling gas price from $2 per gallon to $8 per gallon would likely significantly change buying behaviour.

Gross revenue = price * amount sold

Therefore if you can double your price with only a 20% reduction in demand then you're improving revenue.

However if you double your price and have an 80% reduction in demand then your revenue will decrease.

So far (ie. up to current prices), there's been a huge increase in price, but only a relatively small decrease in demand. Sure a few people have switched to bikes, but only few. What is important is the consumption of the whole market.

Prices are probably now at the point where there is an inflection in the curve; the point where people start to modify their buying behaviour due to price.

Given that the world's commercial infrastructure runs on oil, they could probably keep driving up prices until a lot of people switch to bikes for their personal use because trucking and other activities would keep them going.

Written in July 2008

"So far (ie. up to current prices), there's been a huge increase in price, but only a relatively small decrease in demand"

I will respectfully disagree, citing the massive troubles that GM and Ford find themselves in due to the disappearance of the SUV market in the US. This would indicate a more than a relatively small decrease in demand.
Anecdotally, bus and train companies are facing massive problems scaling up fast enough to cater for the increase in passenger numbers.
I'll repeat that I don't know if oil companies sell themselves fuel, but if it has contributed to high prices, they have done massive damage to their demand. Long term damage that may linger into a period of lower prices
5 years ago, OPEC deemed that the sweet spot for long term profits from oil was $28 per barrel. A lower price would mean that supply could not meet demand, higer than that would mean that alternative energy would become more relevant. That figure may have risen, but not 5 fold.

Written in July 2008

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