Quote:
U Boat Commander said:
IMO, if gas prices hit $4/gal in the US, we're looking at a recession, which will slow economic activity and then lower the price of gas. Demand for gas in the US fell when gas got over $3/gal. I think the prevailing wisdom here is that $3/gal seems to be the price at which demand becomes "elastic". I'm sure we'll see $4/gal someday here in the US. But with the warm winter were having, I doubt it will be anytime soon. We would have to see another bad hurrican season next year or an oil shock out of OPEC to get there.



Right, a recession might occur, reducing demand (shifting the demand curve to the left) for gasoline. But recessions eventually end. Regarding the price elasticity of demand for gasoline, over the short run (i.e., moving along the demand curve and not shifting it), the price elasticity of demand is extremely low, about -.05 to -.15, meaning that it takes a 100% increase in price to reduce the quantity demanded by 5 to 15%. Over the longer run, if prices stay high, more fuel efficient vehicles will be offered by manufacturers and this makes the long-run demand curve for gasoline more price elastic. But it never gets above the level of -1, meaning that significant and permanent price hikes rarely, if ever, lead to reduced total revenues for oil companies in the sale of gasoline. It would take some monumental shift in technology for this to occur. Neither hybrid vehicles nor fuel cells are likely to bring this about, at least for the foreseeable future (meaning next 10-20 years).

Jim