Elasticity – It’s Not Just for Waistbands

Elasticity – It’s Not Just for Waistbands

Many of us will be taking to the roads or skies this 4th of July weekend to visit family members, go to the beach, set off some fireworks and/or pig out at a BBQ. Of course, soaring fuel prices have increased the cost of having fun to the point of keeping some people at home for this extended holiday weekend. In fact, AAA reports the number of holiday travelers will decline for the first time in a decade. Obviously consumer response in the U.S. to high gasoline has been quick and measurable, and some analysts suggest we (by that I mean economists) have underestimated the price elasticity of energy. I'm not a fan of the ‘structural' shift idea that says business and consumer demand has been permanently reduced, but one only has to see stories like this (subscription required) or read the latest auto sales report to realize something is afoot.

Even on the supply side, which is indeed slower to respond due in part to the logistics of it, high prices are sending energy companies to some not-so-obvious locales to extract oil that would otherwise be too expensive, and in the process, some regular folks are getting paid.

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