Gas Crisis? Huh?

[flynrider]

You haven't checked a single fact I've presented here.

You've referenced many economic theories, which even economists do not consider fact. They do not appear match real world data. I've pointed to several historical examples where price followed demand fluctuations (and vice versa) which you never directly addressed or explained.

At least it sounds like you just admitted you never studied economics at the college level. Which makes this whole debate pointless.

If you want to debate what they teach in a college economics class, you're right. It is pointless. I'm more concerned with what happens in real life.

What's important here is to realize the nature of oil's demand (and products derived from it) and how deal with that and what its impacts are.

I do realize that. Rather than looking in a textbook, I can look at demand and pricing data and see conclusively that people don't use as much gas when the price spikes, and they go back to using a lot more when the price drops. This was evident in the 70s, when the government tried to freeze gas prices (triggering shortages and lines) and it was evident last fall. I've heard and seen several TV and radio interviews lately with service station owners who plainly see that their volume drops whenever the price goes up. They don't seem to be confused about this either. Perhaps we should send them to college and straighten them out

I learned a lot of things in college (surprise, surprise!) that were not applicable to real world situations. Sometimes I think they owe me a refund.

And if you shorted oil futures nows the time to cover. Prices have dropped $5 in the last 5 days I think for July contracts

No comment. I'm off to earn my Pulitzer Prize

[flynrider]

FlyNRider's Pulitzer Prize Winning Economic Tome

The big beef here seems to be elasticity. You point to oil as an example of a commodity with an inelastic demand. You also provide the example of prescription drugs. You keep pointing to the fact that there is no substitute for either, therefore price cannot affect demand. Let's look at the elasticity of demand.

I agree entirely that a prescription drug (that is still under patent) has an inelastic demand. If the price goes up, you cannot use a different product (there is none available) and most importantly you cannot use less of it. Demand is truly inelastic because you have no choice other than to buy the same amount at the higher price.

Gasoline is only inelastic in your textbook. It must assume that the average person requires x gallons per week to conduct their lives and nothing less than x gallons will suffice. If that were true, price would not affect demand. Unfortunately for your inelastic demand theory, that is not remotely true. The average American that drives a 13 mpg SUV solo to work every day has a huge amount of elasticity in their demand. When the price gets high enough to be painful, people cut their consumption substantially by carpooling, combining trips driving more fuel efficient vehicles and cutting recreational fuel use. There's no surprise to me abuot the number of noobs that post they are switching to a motorcycle to save on gas. Given that the average American consumer is the single largest user of this commodity, small cuts in consumption by the average user adds up to a substantial decline in overall demand. As I pointed out before, this was quite evident following the Katrina spike, where consumption dropped 9% and the price dropped nearly 30%. If that's not an example of real life elasticity, I don't know what is, regardless of what your textbook says.

Inelastic means you can't change the commodity, nor the amount used. Since we Americans are the worlds leading fuel hogs, there's a vast amount of elasticity in our demand, and it shows plainly in the data.

Now where's my prize!

[CNF2002]

In defense of Americans, there is a good reason why we are fuel hogs. Not many countries afford its citizens the freedom that America does. In the US I could drive 1000 miles, right now, just for the heck of it. In other countries I would need permits and special permission as I could have crossed into quite a few other countries during my trip! We are completely urbanized, but the majority of us still live in the suburbs. Americans commute like no one else!

We have the freedom to take trips to far away lands in our own country, but they are within reasonable distance. A few days a most. And wherever we go, there is a thriving metropolis close by with countless places to spend our money and enjoy luxury. What other countries have that?

We have it good here...and our fuel usage reflects the open nature of our country. But as I said, I dont think the gas prices right now are a huge crisis. We can easily curb our usage to make up the difference. I love this discussion.

[MrGompers]

You were close on that one. However, the changes in demand you note are not related to price. That is what I've been saying all along.
The demand can have small flucuations. Since (if you studied economics & mathematics) you would know why this is true and you would also know why no product can have perfect inelastic demand.

To illustrate, for a product to have perfect inelasticity of demand the demand would have to equal zero. (on a graph it would be vertical 90 degrees) Not only is this impossible in economics it also violates a rule of mathematics. i.e. you can not divide by zero.

This is known as the price elasticity of demand. No amount of data you can compile and no amount of anedotes you can come up with will ever disprove this.

From a textbook,

If demand is very inelastic, then large changes in price won't do very much to the quantity demanded. For instance, in the inelastic curve below, a price jump of a full dollar reduces the demand by just 2 units. With inelastic curves, it takes a very big jump in price to change how much demand there is in the graph below. Possible explanations for this situation could be that the good is an essential good that is not easily substituted for by other goods. Oil & gas meet this condition. That is, for a good with an inelastic curve, customers really want or really need the good, and they can't get want that good offers from anywhere else. This means that consumers will need to buy the same amount of the good from week to week, regardless of the price.


E_____1 5__|....\x
C_____1 25_|......\
I_____ 1___.|........\
R_____.75__|..........\
P_____.50__|............\x
______.25__|_______\D
......................1 2 3 4 5 6 7 8 9
............................Quantity

Notice how that demand curve trends to the vertical. D = demand

If you are this stubborn in the face of overwhelming evidence I pray to(insert selected diety here) that you DO NOT have access to OPM.
If you work in financial markets you know what OPM is.

Then again maybe your just old and went to college in the 1890s.

[MrGompers]

FlyNRider's Pulitzer Prize Winning Economic Tome

Inelastic means you can't change the commodity, nor the amount used. Since we Americans are the worlds leading fuel hogs, there's a vast amount of elasticity in our demand, and it shows plainly in the data.

You are forgetting that as people withdraw from the market (withdrawing thier demand) others come in to take their place. You are getting close with your analysis here. Better than before. You are still missing a major component. Inelasic goods have no subsitutes. If there was no gasoline tomorrow...what would you put in your car ? I'm surprised you saw it so easily with prescription drugs tho.

Maybe I should use that to better illustrate. (I am making up this data)

1,000,000 people need insulin to survive everyday in the usa.
These people (or their insurance companies) pay $2.5 for each injection.

One week later;

1,000,100 people need insulin to survive everyday in the usa.
These people (or their insurance companies) pay $25 for each injection.
You see how demand slighty rose. That in no way can account for the rise in price tho. The suppliers can set the price to whatever they want.

If the price actually gets high enough people will seek out alternatives or invent them. Oil has not reached that point yet. And it never will.

One thing to keep in mind however, no product can have perfect inelastic demand. Which is the situation you are trying to describe. The demand change you saw of 9% did not affect the price of gasoline. I can see why you think it does this is a trap many people fall into. And its exactly what oil companies and govt want you to think.

This is the information society needs to be armed with. Pretend you are going to debate an oil exec or govt official on this topic. This is what you need to know & show. They are already aware of this. They have many smarter economists on their payroll than we do. They are laughing all the way to the bank. Speculators are laughing too.

I'm not even getting into the overall effect oil has on the American economy and the worldwide economies. The price of oil affects the prices of every good across every sector. Every person in the USA needs energy. Even poor people buy energy. Every person in the world eats food. Most of that food is delivered via truck that burns oil & gas. The list goes on & on infinitely and it affects every single person on the planet. (unless your Amish I guess)

The textbook definition for inelastic demand is exactly what you want. Thats how simple this is. The same textbook also contains the solution.

And no that solution doesn't involve ninjas. Altho, I wish it did.

[flynrider]

OK Mr. Gompers. I can see that I'm never going to get your nose out of the textbook, so let's just disagree about this.

I've been trying to argue from the start, that actual, real life, real world data does not jibe with your textbook examples. This is obvious to people who trade in petroleum and people who own gasoline stations. You will not convince me that a spike in price will not reduce demand. It has happened, and I've made a few dollars off that fact, numerous times.

According to your ivory tower view, I must be the luckiest guy in the world to still be solvent, with my substandard education. So be it. You sit in your tower, and I'll laugh to the bank. I love academics

[MrGompers]

OK Mr. Gompers. I can see that I'm never going to get your nose out of the textbook, so let's just disagree about this.

I've been trying to argue from the start, that actual, real life, real world data does not jibe with your textbook examples. This is obvious to people who trade in petroleum and people who own gasoline stations. You will not convince me that a spike in price will not reduce demand. It has happened, and I've made a few dollars off that fact, numerous times.

According to your ivory tower view, I must be the luckiest guy in the world to still be solvent, with my substandard education. So be it. You sit in your tower, and I'll laugh to the bank. I love academics

You have fallen into the same traps that my classmates did in economics. This topic was debated heavily during that time and was overseen by a PHD. In the end the PHD agrees with me.

In the off chance that I didn't make myself clear before here it goes again. Flucuatations in price of goods with inelastic demand can affect demand. However, that change does not put the demand curve greater than one. This is one hallmark of inelastic goods. The demand curve stays within 0 and 1. Conversely, goods with elastic demand have demand curves greater than one.

For reasons I already stated no good can have perfect demand inelasticity. Since it violates at least 1 law of ecomomics and at least one law of mathematics.

The real life data that you are seeing and exploiting in the petro market don't invalid what I'm saying here at all. These fluctuations still put the demand within 0 and 1. You can take any [oil] data set you so desire and plug it into the equation. You will never get a value greater than one.

After you get thru the macro & microeconomics classes in college the study of economics is really the study of mathematics. Mathematics is a great subject because there is no ambiguity in the results. Obviously, some poeple don't see it that way.

Do you realize that all the hedge fund managers out there are employing people with PHD's in math,economics, and finance? These PHD's are very aware of what I'm illustrating here and are exploiting it to the fullest.
If you have access to one of these people you should ask them about this subject. They will surely agree.

I don't live in an ivory tower. I have been working in the investments field for 10 years.

Downloading the Black-Sholes trading model for commodities does not make you an expert in economics or investments.