An Inelastic Snap
A barrel of crude oil has nearly doubled in price in the last two years, and retail prices of about $4 per gallon are around 50% higher than just a year ago.
And most people shrug and pay it?
This would be called a perfect example of inelastic demand in the parlance of economists, meaning that consumption doesn't seem all too sensitive to pricing. Cost goes up or down, but folks -- maybe not all, but certainly a vast majority of consumers -- just keep on buying.
The media can't provide a rational explanation for what's going on. Nobody fully accepts (or understands) wan references to China needing more oil, or America needing to swap pristine wildlife reserves for drilling derricks. If supplies are really getting tight, why is it that not one expert predicted the demand? The vaunted mechanism of the free market seems to be in full catch-up, or reaction mode.
But to what is it reacting, exactly? I find this lack of a clear, concise, credible answer rather incredible.
What's more amazing, though, is that consumers seem willing to overlook this oversight and, shockingly, continue to consume the stuff like it is going out of style (which it very well might be).
What does this tell us about how people make choices?
- We don't weigh options too well. So how many of us are driving less because gas costs so much more? OK, maybe some people, but not many, according to the consumption figures (the oil companies are selling all the gas they can deliver). As a 50% higher expense, you'd think consumers would see some trade-offs revalued, and perhaps change their behavior? One trip to the mall instead of two? Combining errands to a single journey? Biking or walking instead of driving to a close-in destination?
- We compartmentalize. What if we consciously considered that the oil companies will soon be doubling the money they charge us for the privilege of helping to destroy the planet? Wouldn't that affect our refill intentions ever-so slightly? Now, count all of the impacts of rotten traffic (delays, aggravation, risk and cost of accidents), and it's almost like we wear one "head" when we drive, and another when we choose to think about all those other things that supposedly matter to us (or that we consider a bother).
- We really don't remember things for long. Weren't you pretty shocked and/or angry when you realized that filling your gas tank cost so much that first time? I bet you felt less so the second time, and by the time you reached the 10th refill, you barely shrugged your disapproval. When the newscasters proclaim that oil prices have declined a few pennies, should we feel relieved? It just means that the cost may level, or go down slightly. But does anyone remember...truly remember, as in an active realization...how cheap gas used to be?
Remember, I'm talking about the same consumers (you and me included) whom we hope will be aware of our branding, absorb and contemplate it, and then apply what we’ve promoted to their purchase decisions.
Uh oh.
While the snap of this inelastic demand of ours for gas might sting, it isn't prompting a broad overhaul of our behavior that I'd expect (and wish) to see. Bulbs brighter than I am should be talking about why.
Maybe the price has to reach some as-yet unimagined threshold (like the prices Europeans pay?). Perhaps we’ll take action when we see the impacts of costly oil ripple through other industries (airfare is going to keep getting expensive; retailers will possibly start raising prices to help defray shipping costs, etc.).
But so far, it's just revealing how difficult, imprecise, and utterly confounding the influences on purchase behavior can be.







