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Tilting at Windmills

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May 12, 2008
By: Kevin Drum

DOWNWARD SLOPING DEMAND CURVES....Megan McArdle:

The cable news shows this morning were full of wide-eyed anchor larvae reporting that with gas prices high, people were driving less, and instead using more public transit! Oh, for a land in which the downward-sloping demand curve was not such a constant source of surprise and wonder to the broadcast media.

I bow to no one in my general contempt for cable news talkers — Shakespeare would undoubtedly update Dick's famous line in Henry VI if he were writing it today — but for five years U.S. gasoline consumption has been famously impervious to sharply rising prices. The cost of a tank of unleaded has more than doubled since 2002, but consumption has merrily kept rising 1.5% a year anyway. It was only in 2007 that consumption even started to flatten out, and only this year that it's projected to decline — ever so slightly. So can we really blame the cable talkers for being a little surprised that consumer behavior is finally changing?

Besides, it might not even be the price of gas that's responsible. Gasoline consumption does fall during recessions, and that might have as much to do with the recent reduction in driving as prices at the pump.

More generally, though, sure, demand curves slope downward. But that's the starting point of any serious discussion, not a devastating comeback that ends it. If the slope is very mild, as it seems to be with gasoline consumption and minimum wage labor markets, for example, there might be other factors at play that introduce enough real-world noise to flatten out the curve over part of its range. It's an empirical question, not an ideological one, and there's no way of knowing for sure except by looking at the data.

Kevin Drum 7:24 PM Permalink | Trackbacks | Comments (37)

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but for five years U.S. gasoline consumption has been famously impervious to sharply rising prices. The cost of a tank of unleaded has more than doubled since 2002, but consumption has merrily kept rising 1.5% a year anyway. It was only in 2007 that consumption even started to flatten out, and only this year that it's projected to decline — ever so slightly. So can we really blame the cable talkers for being a little surprised that consumer behavior is finally changing?

Um. Yes, we can. Really, its worthy of note, but not surprising. It is far more unusual for consumer response to price for a product to be delayed than it is for it to be completely absent, and both the increase in mass transit use and the increase in fuel-efficient car purchases that the media have been breathless about recently are the kind of things that you would not expect to be immediate reactions to price spikes, but rather the kind of changes you'd expect people to make after sustained price increases vs. personal income convinced them that major changes in lifestyle were desirable or even necessary.

Posted by: cmdicely on May 12, 2008 at 7:42 PM | PERMALINK

Remember your college Econ 101 folks! Gas is one of the few products that has a inelastic demand curve. It can go to $5.00 easily with little effect on demand....people will still pay it. Any recent turn down was most likely casued by the recession.
Yep, more fuel efficent cars will play a role, but with global demand going nowhere but up, and the number of people in the US increasing, look for gas to hit the $8 range before any real demand reduction occurs.
Old habits die hard. (And so do "oil habits").

Posted by: DesertDog on May 12, 2008 at 7:47 PM | PERMALINK

Oh, for an Atlantic.com where McArdle's downward-sloping pinhead wasn't polluting the internet to the surprise and wonder of no one who has ever read her twaddle.

Posted by: McArdle = Idiot on May 12, 2008 at 7:49 PM | PERMALINK

mcardle = idiot beats me to the point: can anyone point me to a megan mccardle posting that demonstrates intelligence?

Posted by: howard on May 12, 2008 at 7:59 PM | PERMALINK

How much of this is due to population growth? I'm not saying that it would matter as far as changing the price paid, but it would be interesting to see a per capita change (if any).

Posted by: jhm on May 12, 2008 at 7:59 PM | PERMALINK

Fuel economy since 2004 has been increasing. From the EPA:

http://www.epa.gov/oms/cert/mpg/fetrends/420s07001.htm

"Since 1975, overall new light-duty vehicle fuel economy has moved through four phases:

1. a rapid increase from 1975 through the early 1980s,
2. a slower increase until reaching its peak in 1987,
3. a gradual decline until 2004, and
4. an increase in 2005 and 2006, with 2007 levels projected to be similar to 2006."

"Overall fuel economy increased 0.9 mpg, or 5%, from 19.3 mpg in MY2004 to 20.2 mpg in MY2006. Fuel economy for both cars and trucks is projected to increase for MY2007. However, due to a slight increase in projected truck market share, the overall value for MY2007 is also projected to be 20.2 mpg. The increases in 2005 and 2006 are the first consecutive annual increases in fuel economy since the mid-1980s. This reverses a long trend of slowly declining fuel economy since the 1987 peak."

Posted by: Doc at the Radar Station on May 12, 2008 at 8:27 PM | PERMALINK

how is it that virtually no one gets the "big picture"?

a member of the saudi royal family is known widely as 'bandar bush".

don't you think that puts the cart before the horse? isn't it more accurately said that the president of the usa, within the family, is known as george al-saud? along with his rockefeller cousin, richard al-saud.

never,ever forget, the bush family first made its bones as a capo regime for the rockefeller family. the same is true of cheney.

when you look at these individuals, and you fail to see them as rockefeller courtiers[aka al-saud courtiers], you are missing most of their real identity.

does a seemingly inexplicable and enormous rise in the price of hydrocarbons need any other explanation other than that those that own the amerikan political system want to be fed more dollars?

make no mistake, the house of al-saud and rockefeller [also rothschild] own the amerikan political system today. all the candidates currently running are their puppets.

and while you concentrate on the three card monte game that is increasingly the heart of amerikan presidential politics, your pockets are being "picked".

proof positive that higher education is a con. education only confers a degree. it doesn't result in any improvement in thinking.

so it goes. a nation rushing[so to speak] to impoverishment.

closing, i recommend you take the time to listen to the episode on the current economic crisis on the ira glass show, this american life.

it will tell you everything. a populace abandoning all strictures of integrity and true morality can only complete its downward spiral by passing through the locus of where we are now. as tom lehrer once said, this is but an interim stop on the usa's slide down the razor blade.

you can read jamie dimon, ceo of the fed's bank - jpmorganchase - today. he tells you that if you want to believe the cnbc shills, you are entitled to do that. but, even with the fabulous financing he finagled from the fed to acquire bs, even he isn't sure that it will be an undamaging acquisition.

more importantly, he disputes the cnbc shills[ppt] by saying that we may only be in the initial stages of a grotesquely deep recession[eg, 1982].

that is an observation to note. 1982 was pretty nasty. and when it was thought to have ended, there was 1986.

the most important aspect to those economic disruptions was the influence of the bush[rockefeller] family, the mob, the saudi royal family, and a host of bipartisan politicians[lackeys to all of the above].

pete brewton told this story more completely than anyone. in the houston post.

try to find his stories. they were considered so uniquely outrageous that the the columbia journalism review came to houston to review his evidence. you might find their conclusion based on their investigation: pete brewton got it accurately.

still, the new york/washington pravdas refused to report that history.

so, my guess is that most of you don't have an inkling of knowledge about that earlier "bust-out" looting history.

suffice it to say, same players, 20-25 yrs later.

Posted by: albertchampion on May 12, 2008 at 8:40 PM | PERMALINK

Fuel economy since 2004 has been increasing.

Add this to the reports, of which I've heard three in the last week, that people are getting pennies on the dollar for trade-ins of SUVs. Well below blue book value. Dealers simply don't want them. They can't sell them, and more people are trading them in for fuel efficient cars.

Posted by: Seitz on May 12, 2008 at 8:48 PM | PERMALINK

Kevin: It's an empirical question, not an ideological one,

Sure, if you're willing to leave 90% of the Republican party out of the conversation.

and there's no way of knowing for sure except by looking at the data.

There goes the other 10%

Posted by: anandine on May 12, 2008 at 9:08 PM | PERMALINK

Though my standard rant is that you could start biking small trips any day you wanted to, in fact, the delays in switching to any transport alternatives are large. It takes weeks to months to get in good enough shape (and confident enough) to put serious miles on a bicycle. (But if you think you want that option, might as well start getting in shape now.)

Mass transit seems to be regarded as working well enough if busses/trains are crammed like sardine cans during rush hour -- that is surely cost-effective, but it means that if you add more riders, it's inconvenient all round, and the transit agencies typically respond slowly to increased demand (an interesting contrast was after the Loma Prieta quake in 1989, when poof!, CalTrain added all sorts of capacity, and I think started running trains to Gilroy. I remember thinking, "hey, they can do that? Why did they wait till now?") Here in the Boston area, the parking garage at Alewife fills up every single weekday, preventing an easy increase in subway commuters. Why not build it bigger? Why not charge more and plow the extra revenues into more feeder bus lines? The metrics by which these systems are evaluated are definitely screwed up.

It would also help if busses were given yet more special traffic privileges than they already are (some get special lanes in some places). A double bus with 80 people on it should simply get right of way through intersections -- the utility of getting 80 people through that intersection without waiting for the light, vastly exceeds the utility of not delaying 4 or 5 automobiles for the time it takes to transit the intersection.

Posted by: dr2chase on May 12, 2008 at 9:16 PM | PERMALINK

Demand curves slope downward when price, not time, is plotted on the X axis. I trust everyone understands this.

In any case, there is less than 50 and probably less than 30 years of oil left. Better think of something fast....

Posted by: The Conservative Deflator on May 12, 2008 at 9:22 PM | PERMALINK

Though my standard rant is that you could start biking small trips any day you wanted to, in fact, the delays in switching to any transport alternatives are large. It takes weeks to months to get in good enough shape (and confident enough) to put serious miles on a bicycle. (But if you think you want that option, might as well start getting in shape now.)

Eh, you're making it sound like drudgery. Tis the season to dust off your bike frame, slap a little lube on your chain, put a little air in your tires, and begin to enjoy short trips to the places you *can* go -- your favorite coffee shop, the local Quick-E-Mart, & your bookseller of choice. The point isn't to be fast. The point is to enjoy time spent out of your car. Before you know it, you'll be going more -- and farther -- places. As the man said, "Outside of a dog, a bicycle is man's best friend. Inside of a dog, it's too dark to see."

Posted by: junebug on May 12, 2008 at 11:53 PM | PERMALINK

According to Amory Lovins, Paul Hawken, et al, in Natural Capitalism, energy consumption fell 6% during the 1979-83 oil shock, while the economy grew 19%. Real oil prices are just now getting back to the same level.

A large part of the problem is cultural. Energy consumption is inelastic because mainstream corporate culture has no idea what the alternatives are. A good example is waste heat recycling, which could cut overall fossil fuel consumption in half with no reduction in energy output. When an industry is dominated by a handful of corporations that share the same organizational culture, and are insulated from genuine cost competition by a heavily cartelized market, there's very little incentive to pick even the low-hanging fruit.

Likewise, passive solar design can reduce heating costs to almost zero in the winter, and ditto for passive solar cooling that uses the temperature differential between the air and 10 ft. underground. These modest-priced techniques could reduce home energy consumption by an order of magnitude. I would guess most building contractors have never heard of them. At some point, though, we're going to reach the threshold where the early adopters start getting press and it catches on.

If we adopted technologies like the ones above, substituted rail for air and truck shipping, and went back to pre-1920s urban design, we could probably have the same standard of living on a quarter of the energy.

Posted by: Kevin Carson on May 13, 2008 at 12:19 AM | PERMALINK

How about people had to drive further to find or to have work. And now don't matter how far they drive, they know there's nothing there for them.

I imagine that could be calculated.


Posted by: jim p on May 13, 2008 at 1:05 AM | PERMALINK

Imagine how all this is effecting big-city cab industries- imagine you're running a business, and then, over the course of 6 years, a very significant expense of yours more than doubles in price.

I guess for a while, they'll try to deal with it with increased fares, but after a while, it's got to hurt the industry. Not that money people can afford to throw away big bucks on a cab.

And imagine how sticky and crowded the subways are going to get over the summer in NYC- even more often than usual!! It's going to drive people bonkers.

It's a good thing crime was reduced so much there over the years, or that city would have a real touhg time this summer.

Posted by: Swan on May 13, 2008 at 1:23 AM | PERMALINK

A couple of months ago I bought this meter called a kill-a-watt. You plug it into the wall, and your electronics or appliances into that. The readout tells you the watts, amps, volts, power factor, kwh since plugging in, and hours since plugged in.

I wrote down the power use of everything I could measure, and guessed on a few more. Light fixtures are all pretty predictable: whatever the bulb rating is their power use.

I found a large part of my use was in lighting and our electronics ... PC with all the periperals, and the TV with amplifier, DVD, game machine...

I replaced all our lights with CFLs. I bought two "smart strips" - power strips that watch a "master" outlet, and when power dips down (like a PC on standby) it shuts off power to everything else on the strip.

Anyway, the bottom line is we cut our electricity use from over 600 kwh/month to about 450kwh/month. And that was relatively painless. It was all low-hanging fruit.

I'm applying that attitude towards water use, now.

Posted by: anonymous on May 13, 2008 at 1:37 AM | PERMALINK

I wrote:

Not that money people can afford to throw away big bucks on a cab.

Oops, that was supposed to be "many people." I'm up too late! :-P

Posted by: Swan on May 13, 2008 at 1:55 AM | PERMALINK

Income elasticity of gasoline consumption will still be positive.

More income ie more GDP, more Vehicle Miles Travelled, and more gasoline consumed.

It's only in the extremis (like now) that the countervailing effect of negative price elasticity of demand is felt.

Posted by: Valuethinker on May 13, 2008 at 4:53 AM | PERMALINK

Our infrastructure and settlement patterns allows for ONLY private vehicles to serve our transportation needs.

There are four multiplying factors that drive fuel consumption:

1. Background economy (When GDP rises 5%, likely transportation needs will rise similarly). If people learn to simplify and get more experienced value per dollar spent, then we don't necessarily need a rapidly growing economy.

2. Technology available and chosen - When we drive vehicles that get 20 mpg and shift as a society to vehicles that get 40 mpg for the same service of deliverying people and goods from place to place, we will save 50% of the energy

3. Degree of shared services - If we apply mass transit, and/or ridesharing for example and increase the number of individuals per trip from 1.2 to 2.4, we will save 50% of the energy.

4. Settlement and industrial siting patterns - If we enact policies that encourage the decentral siting of workplaces, and manufacturing and encourage small cities (so people have more opportunity to work closer to home) rather than large cities that result in 50% less transportation needs, we will save.


So, multiply these things together, and if we realize an increase in our quality of life with the same economic output, apply technologies that consume 50% less fuel per service, and share rides that transport twice as many goods and people per trip, and reduce the average distance that goods and people need to be transported, we will realize an 87.5% decrease in the amount of energy consumed.

1 (economic growth) * .5 (technology efficiency) * .5 (utilization, rideshareing) * .5 (settlement and siting design)

Posted by: Richard Witty on May 13, 2008 at 6:57 AM | PERMALINK

McArdle really seems to think that MicroEc 101 textbook (she doesn't seem to be able to think beyond the most elementary models) is Archimedes' lever, doesn't she?

Posted by: kth on May 13, 2008 at 7:01 AM | PERMALINK

I was still chuckling at the comments to McArdle's post when I flipped to the next one up and lost it completely.
There's nothing more amusing than trust fund glibertarians pretending deep and sincere concern for the poor as justification for their arguments against a minimum wage that keeps pace with inflation.

Posted by: melior on May 13, 2008 at 8:29 AM | PERMALINK

The numbers of motorists are increasing every year.

Driving less is not as effective as driving more efficient vehicles.

Posted by: bakho on May 13, 2008 at 8:34 AM | PERMALINK

Our infrastructure and settlement patterns allows for ONLY private vehicles to serve our transportation needs

That makes sense to me. I live in Arlington, Texas, which has no public transit. If you buy a house here in the DFW suburbs you effectively must drive to work or be unemployed. Your commute, which is most of your driving, is an extremely inelastic part of your budget.

It would be interesting to see regional data on gas consumption.

Posted by: Tim Morris on May 13, 2008 at 10:07 AM | PERMALINK

Classic McArdle -- pointing out how ignorant someone else is, when really, it's her.

(Or "it's she," for the P.C. among you -- "pedantically correct.")

Posted by: Anderson on May 13, 2008 at 10:49 AM | PERMALINK
In any case, there is less than 50 and probably less than 30 years of oil left.

Perhaps current proven reserves at current consumption, sure; but the same was true 20 years ago. Oil running out absolutely isn't the real issue, climate change and oil becoming increasingly expensive to extract are the real issue. (Eventually, oil will "run out" as an energy source, though probably not absolutely: eventually, the energy cost to extract a barrel of oil will exceed the energy that can be extracted from a barrel of oil, and while oil might still have industrial uses, it won't be economically viable as a fuel.)

Posted by: cmdicely on May 13, 2008 at 11:18 AM | PERMALINK

Hey, Kevin, I don't know that that "kill all the lawyers" line actually reflected Shakespeare's disdain for the profession; in the play, it's spoken by a member of a marauding lynch mob, as your link points out.

Posted by: HJA on May 13, 2008 at 11:58 AM | PERMALINK

Kevin Carson: Real oil prices are just now getting back to the same level.

No, real oil prices are higher than they've ever been.

substituted rail for air and truck shipping

Already happening. Over the last few years (even before the big spikes of the last few months) rail freight in the US has increased by about 1/3 - most of that being switched over from trucks.

Another bit of trivia: the US ships more of its freight by rail than Europe does.

Posted by: alex on May 13, 2008 at 12:05 PM | PERMALINK

Kevin: re: "If the slope is very mild, as it seems to be with gasoline consumption and minimum wage labor markets, for example, there might be other factors at play that introduce enough real-world noise to flatten out the curve over part of its range."

I think you mean something like "if the slope is very severe i.e., nearly vertical...." so that changes in price lead to only modest changes in quantity demanded, and thereby give you the inelastic behavior that others have mentioned.

I don't know what you mean by "flattening out" unless you are referring to the time series, which is something else altogether, as someone else pointed out

Posted by: DB on May 13, 2008 at 12:28 PM | PERMALINK

Hi, Kevin,

Very insightful post, as usual, but there is a typo in the penultimate line: "If the slope is very mild, as it seems to be with gasoline consumption and minimum wage labor markets ..."

You meant to write, "If the slope is very /steep/, as it ..."

Demand for gasoline and low wage labor means that quantity doesn't change much with price. As conventionally, drawn, price is on the vertical axis, so an inelastic curve is steep.

Posted by: Noel Maurer on May 13, 2008 at 12:59 PM | PERMALINK

Over the last few years (even before the big spikes of the last few months) rail freight in the US has increased by about 1/3 - most of that being switched over from trucks.

I haven't seen the "double-stacked intermodal" trains where I live yet, but I've read stories where they are modifying tunnels, etc., to accept the added clearance requirements. Here's a YouTube video of a double-stacker train.

Posted by: Doc at the Radar Station on May 13, 2008 at 1:19 PM | PERMALINK

I bow to no one in my general contempt for virulent bloggers (you're the exception Kevin) but while it's true people still have to go to work, and old habits die hard, people are making small changes - sales of SUVs are going down, more people are starting to take public transportation(at least in LA):

Metro ridership increases

Posted by: Andy on May 13, 2008 at 1:21 PM | PERMALINK

Doc at the Radar Station: I haven't seen the "double-stacked intermodal" trains where I live yet, but I've read stories where they are modifying tunnels, etc.

Here on Long Island one of the great ironies is that we have congested highways, lots of railroad tracks (LIRR) and almost no rail freight. It's brilliant!

"Long Island" in this case includes not only the suburban counties, but the NYC boroughs of Brooklyn and Queens as well. To boot, the boroughs of Staten Island and the Bronx are affected by the extra truck traffic.

Of course we've only been waiting for the Cross-Harbor Rail Tunnel for about 115 years. These things take time.

Posted by: alex on May 13, 2008 at 1:53 PM | PERMALINK

I didn't see DB's post, which made the same point as mine. Apologies, DB!

It's just convention that put price on the vertical axis, but it is a pretty strong convention. FWIW.

Posted by: Noel Maurer on May 13, 2008 at 2:31 PM | PERMALINK

anonymous,

Cutting electrical usage is a good thing, of course, but it will not help the oil crisis. Most electrical generation is done with natural gas (which is also running out), coal (which is dirty) and nuclear (with the waste problem). Some power companies have diesel generators they can use during an emergency or as a temporary supplement during a peak but other than that they don't use oil.

Still, cutting on electricity is very helpful for greenhouse gases and helps keep the price of natural gas down. Since natural gas is also used to make fertilizer saving on electricity will also indirectly lower some food costs. Of course burning the food to fuel our cars drives the price of food up.

Posted by: Tripp on May 13, 2008 at 3:00 PM | PERMALINK

Tripp

Most electricity generation is done with coal:

- 50% of US generation
- 80% of Chinese generation (or more, plus substantial coal used for home heating)
- 50% or so of German generation
- 30% of UK generation
- 80% of Indian generation
- 30% of Canadian generation

The bulk of backup power generation using oil is actually oil distillate running in straight gas turbines (ie not combined cylce). About 3-4% of US generation, still (typically peaking power).

Posted by: Valuethinker on May 13, 2008 at 4:51 PM | PERMALINK

Better is a downward sloping demand curve for McCardle's twittery.

Posted by: Gregory on May 13, 2008 at 5:47 PM | PERMALINK

Didn't Kevin say recently he didn't understand why we always make snarky fun of McMegan? And then here he pitches a easy slow-ball right down the middle for us to knock out of the ballpark.

Posted by: nemo on May 14, 2008 at 12:50 PM | PERMALINK




 

 

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