Supply, demand and gas prices. SUVs

["Kim Boydell" <boydell@domain.elided>]

<< I am curious: with the price of
 oil climbing due to a cutback in production, how is more money available to
 the countries that produce if less is produced?  With production
increasing,
 prices are going down...  Pesky that supply and demand stuff...
  >>
Hey, something I know a lot about.

First, does cutting back supply increase revenue?  It can if the demand is,
what economists call, inelastic and what everyone else calls insensitive to
price changes.  i.e. if the producers cutback oil production by 5%, but the
price goes up by 10%, then producers make more money.

The demand for oil is initially very insensitive to price changes.  People
can drive fewer miles, maybe turn down the heat in the house, not use the
pool heater, but generally there isn't too much they can do to really cut
back on using oil.  If the price stays high for a long time then people can
buy smaller more fuel efficient cars, put in high efficiency furnaces, add
insulation to the house and use alternative sources of energy.  The same
thing happens in business, initially they have no choice but to pay the
higher price and buy almost the same amount of oil (or oil products) as
before the price rise.  But eventually they will find ways to reduce the
amount of oil purchased.

For you old farts out there like me, you will remember that this is exactly
what happened after the 1973 oil crisis.  It took about 5 years for consumer
to adjust to the higher prices of oil by reducing their relative demand.  By
1979 the real (adjusted for inflation) price of oil was just about back to
the price seen in the late 1960's, only to go shooting up with the Iranian
revolution.  And it all started again.

Accidents and SUVs.

Physics is a cruel master.  For those hooked on SUVs, just remember that
momentum equals velocity times mass.  The bigger the mass, the more
momentum.  The argument is that SUVs are safer than regular cars because
they are bigger, but what happens when everyone drives an SUV?  More
momentum in accidents and people are worse off.

On the same note, 4wd gives added traction for acceleration, but does
nothing for braking power, or handling  while braking.  Just ask my friend
who put his Jeep in the ditch first snow storm.  "It was great, I left
everybody behind at the light, but I just couldn't slow down in time nor
make the corner."

Regards
Kim
79 spider
_________________________________
Centre for Economic Analysis - Canada Inc.
http://www.home.istar.ca/~boydell

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