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Oil demand responds to prices

Oil demand responds to prices
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First Published: Wed, Jun 11 2008. 11 55 PM IST
Updated: Wed, Jun 11 2008. 11 55 PM IST
Higher prices mean lower consumption. That’s perhaps the most basic lesson in economics. And one that those opposed to increases in the prices of petrol and diesel would do well to remember.
The International Energy Agency (IEA) has cut its forecast on how much oil will be consumed globally — for the fifth consecutive month. The agency says that demand for oil is lower because of record prices. The New York Times had reported last month that Americans are driving less this summer because of high fuel prices. Sales of gas-guzzling SUVs, too, have dropped in the US.
IEA has added that the reductions in oil demand have been “modest” because of strong demand in the emerging economies of Asia, especially India and China. And this extra demand includes those from the oil exporting countries of West Asia. Other data shows that domestic fuel consumption in countries such as Saudi Arabia is growing by leaps and bounds because of the prosperity unleashed by record oil revenues. That leaves less for the export market.
True, the price mechanism may not be the only way that the world has to reduce its oil addiction. The demand for oil is notoriously inelastic. That means that consumers react to high prices with less alacrity than they respond to higher prices of more ordinary stuff. But, prices will continue to be the most important part of the solution.
The price mechanism needs to be backed by global efforts to promote new energy sources, as well as policies to increase the amount of energy we need to produce every unit of national output, or energy efficiency.
That is why the Indian government should try its level best to keep domestic fuel prices in sync with global prices. It will be an incentive for people to use less oil. There are two pay-offs here. The short-term one is that there will be less pressure on the trade deficit. The long-term one is that it will help in keeping some check on carbon emissions.
The BJP has said with rhetorical flourish that a 10% increase in fuel prices is economic terror against citizens. That is nonsense. India needs to price oil at market rates, or at least close to market rates.
Do higher prices reduce oil consumption? Write to us at views@livemint.com
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First Published: Wed, Jun 11 2008. 11 55 PM IST