Comment 27988

By mark2 (anonymous) | Posted December 24, 2008 at 18:42:17

Since definitions are being reviewed, let's properly identify what is being referred to as 'stiffness' or 'flexibility' of demand. The proper economic term for the concept is price elasticity of demand. Price elasticity is the measurement of consumer responsiveness to changes in price of a consumer good. A product like petroleum is known as relatively inelastic, meaning that consumption of the product is not significantly impacted by changes in price. If we look back over the past year, the demand for petroleum products remained relatively unchanged from its September high of $147 per barrel to its current low of $40. The change in consumption of petroleum has been less than 1% during a period where its price has fluctuated by more than 40% over the past year.

It is also important to note that demand for oil has not yet exceeded supply. Consequently it cannot be used to explain the spike in price this past July. At best, it was speculation about approaching peak oil which fuelled the spike.

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