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Imperfect Price-Reversibility of U.S. Gasoline Demand: Asymmetric Responses to Price Increases and Declines

Dermot Gately

Year: 1992
Volume: Volume 13
Number: Number 4
DOI: 10.5547/ISSN0195-6574-EJ-Vol13-No4-10
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Abstract:
This paper describes a framework for analyzing the imperfect pricereversibility ("hysteresis") of oil demand. The oil demand reductions following the oil price increases of the 1970s will not be completely reversed by the price cuts of the 1980s, nor is it necessarily true that these partial demand reversals themselves will be reversed exactly by future price increases. We decompose price into three monotonic series: price increases to maximum historic levels, price cuts, and price recoveries (increases below historic highs). We would expect that the response to price cuts wouldbe no greater than to price recoveries, which in turn would be no greater than for increases in maximum historic price. For evidence of imperfect price-reversibility, we test econometrically the following U.S. data: vehicle miles per driver,the fuel efficiency of the automobile fleet, and gasoline demand per driver. In each case, our econometric results allow us to reject the hypothesis of perfect price-reversibility. The data show smaller response to price cuts than to priceincreases.This has dramatic implications for projections of gasoline and oil demand, especially under low-price assumptions.



The Imperfect Price-Reversibility of World Oil Demand

Dermot Gately

Year: 1993
Volume: Volume14
Number: Number 4
DOI: 10.5547/ISSN0195-6574-EJ-Vol14-No4-11
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Abstract:
This paper examines the price-reversibility of world oil demand, using price decomposition methods employed previously on other energy demand data. We conclude that the reductions in world oil demand following the oil price increases of the 1970s will not be completely reversed by the price cuts of the 1980s. The response to price cuts in the 1980s is perhaps only one-fifth that for price increases in the 1970s. This has dramatic implications for projections of oil demand, especially under low-price assumptions. We also consider the effect on demand of a price recovery (sub-maximum increase) in the 1990s-due either to OPEC or to a carbon tax-specifically whether the effects would be as large as for the price increases of the 1970s or only as large as the smaller demand reversals of the 1980s. On this the results are uncertain, but a tentative conclusion is that the response to a price recovery would lie midway between the small response to price cuts and the larger response to increases in the maximum historical price. Finally, We demonstrate two implications of wrongly assuming that demand is perfectly price-reversible. First, such an assumption will grossly overestimate the demand response to price declines of the 1980s. Secondly, and somewhat surprisingly, it causes an underestimate of the effect of income growth on future demand.





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