Some of this may seem elementary and some of it may need more explaining, but in order to keep this as short as possible, I’m not going to get into heavy detail.
Elasticity, every product has it. It has both elasticity of demand and elasticity of supply. Though government has been affecting the elasticity of supply for self righteous environmental reasoning, I’m going to focus more on the elasticity of demand. Gas and oil are inelastic, in that, the price can go up and usage won’t necessarily go down. It’s a necessary item, but not as necessary as food, clothing, shelter, oxygen, and water. In today’s world, one would have a harder time acquiring the money necessary to provide the food, clothing, and shelter, but not impossible. We can survive without oil, it’s elasticity isn’t as strong as some think.
When the cost of gas went from $1.00 to $1.50, we didn’t like it, but we didn’t change our lifestyles much. When gas prices went to $2.00, again, we didn’t change our lifestyles. Last summer gas reached nearly $3.00 a gallon and many of us had to make changes in our lives, including the type of food we bought, how much food we bought, and where we bought it from. Many people started to buy cheaper brands, cut out extra unnecessary foods, and bought food closer to home rather than buying at our favorite grocery store. Still, we didn’t alter our lives much.
But when oil prices soared to $4.00 practically overnight things had to change. It suddenly became unaffordable for the delivery of these products and so delivery cost increased. Those increases were not incurred by the delivery companies, nor was it incurred by the middle man. The seller of the product simply curbed this by adding the increase in shipping cost onto the consumer. Suddenly food costs had to go up, as did the price of practically every other product that you bought.
The prospect that gas prices won’t go down because both alternative energy and additional supplies, are at least ten years away, caused people to take gas mileage into consideration when they bought new vehicles. This is extremely significant because unlike food choices that can be changed from month to month, the car you drive will more than likely be driven for five to ten years. Without people exchanging SUV’s for smaller, higher gas mileage cars, and small car owners either riding a motorcycle or bicycle to work, the day in day out gas usage is declining, despite travelling the same amount of miles. This reduces the burden to provide to the American consumer.
An Artificial Market
Adding to the the burden of oil by the American consumer is the rapidly growing Asian market, in particular China which will host the 2008 Olympic games. China, which has buying more than it is using in anticipation of the 2008 Olympic games. This is important for more historical reasons. In 1936 Germany held the games, 1968 Mexico held the games, and in 1980 Moscow held the games. Each of these are significant because it is indicitive of what happens when totalitarian nations hold the Olympic games. After the 1936 Olympic games, Nazi Germany launched the start of World War II. In 1968, the Mexican economy was in much better shape than it is today but collapsed soon after the Olympics. The 1980 Olympic games in Moscow had been boycotted due to the invasion of the Soviet Union into Afghanistan. That war continued until 1988, shortly before communisim collapsed.
The short end of this is that we can look at how dictatorships conduct theirselves while the games or going to be held in their respective countries, and what happens shortly after that. We can assume that the Chinese government is hording oil for one of two reasons. The first is because they want to impress the world. When the eyes of the world are on countries, they go out of their way to impress the world. China is no different in this regard and what the world to feel as though China is a wonderful country. After the games are over, the world won’t be looking so closely at China, and things will return to normal.
What we can expect from China after the Olympics is one of two things, either their economy will decline or China will launch an attack on another country. The Chinese can only hold so much oil and at some point the demand from China will decrease. If the Chinese government continues to buy oil after the games as they are currently doing, then more than likely they are preparing for war. Unless the Chinese government is seeking revenge for Nanking, I don’t see this as happening.
As for the economy, with the Olympic games approaching and the world watching, the Chinese government is subsidizing gas in order to help the economy in China. The Chinese people are paying less for gas than the American consumer. When the Olympic games are over, this practice will most likely end.
Ruling out war and the end of the Olympics, the Chinese government will buy much less oil and stop the subsidation of gas. It’s an artificial demand that’s being placed on the oil companies and we will soon see this dissapate.
‘When the U.S. Economy sneezes’
…the rest of the world catches a cold. At least so goes the old adage. If the richest countries are feeling the pains of rising oil prices, what then is it doing to countries that aren’t nearly as wealthy? In the United States, traveling long distances is a part of our lives, but in many other countries traveling to other cities are more vacations than habits. They’re more adaptable of doing without vehicles and are forced to using public transportation and taxis less often. We’ll see this decline, or rather adjustment in other countries continue, even as their economy rises.