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The Adjustment of U.S. Oil Demand to the Price Increases of the 1970s

Dermot Gately and Peter Rappoport

Year: 1988
Volume: Volume 9
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol9-No2-7
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Abstract:
Since the 1979-80 oil price doubling, U.S. oil consumption has declined by about 20 percent, in part because of price-induced conservation. This has caused self-congratulatory euphoria, especially in the first few months of 1986, when both the oil price and OPEC were collapsing. We argue here that the euphoria could well be short-lived. U.S. oil consumption will resume its growth and, within five to ten years, could be higher than ever. Combining these results with the consensus projection of declining domestic production, the outlook for rapidly growing dependence on imported oil is disturbing. Plus ca change, plus c'est la meme chose.



Taking Off: The U.S. Demand for Air Travel and Jet Fuel

Dermot Gately

Year: 1988
Volume: Volume 9
Number: Number 4
DOI: 10.5547/ISSN0195-6574-EJ-Vol9-No4-5
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Abstract:
Since 1965 U.S. air travel has grown three times faster than GNP. Jet fuel demand, although virtually unchanged between 1969 and 1982 because of improved efficiency in fuel use by jet aircraft, has grown 30 percent since 1982. The key question is whether fuel-efficiency improvements can keep up with the rapid growth in air travel.



The U.S. Demand for Highway Travel and Motor Fuel

Dermot Gately

Year: 1990
Volume: Volume 11
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol11-No3-3
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Abstract:
This paper, based on an econometric analysis of annual data since 1965, examines the prospects for US highway travel and fuel demand, disaggregated by vehicle type (cars and light trucks). Despite projections by the US Department of Energy (DOE/EIA) of virtually no change in highway fuel use in the 1990s, we project a growth rate of about 1.3% annually. DOE/EIA assumes extraordinarily rapid improvement in fuel efficiency and relatively slow growth in large trucks' vehicle miles. We project slower gains in fuel efficiency, for all types of vehicles, and faster growth for large trucks' vehicle miles.



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.



Oil Demand in the Industrialized Countries

Joyce Dargay and Dermot Gately

Year: 1994
Volume: Volume 15
Number: Special Issue
DOI: 10.5547/ISSN0195-6574-EJ-Vol15-NoSI-4
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Abstract:
This paper surveys OECD energy and oil demand over the past three decades, analyzing the different paths of transportation oil, non-transportation oil, and non-oil energy-both over time, and relative to income growth. We review both the OECD as a whole, and make regional comparisons within the OECD. We focus especially on the price-irreversibility of oil demand: why oil demand has not surged now that oil prices have returned to pre-1974 levels.Among our conclusions are the following. Mere has been an asymmetric, smaller demand response to the price decreases of the 1980s than to the price increases of the 1970s. We expect a smaller demand response to future price increases than to those of the 1970s. The demand response to future income growth will be not substantially smaller than in the past. Finally, given the prospect of growing dependence on OPEC oil, in the event of a major disruption the lessened responsiveness of demand to price increases could cause dramatic price increases and serious macroeconomic effects.



Strategies for OPEC's Pricing and Output Decisions

Dermot Gately

Year: 1995
Volume: Volume16
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol16-No3-1
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Abstract:
This paper examines OPEC pricing and output strategies, both to provide an understanding of OPECs unwise price doubling in 1979-80 and also to analyze what strategy might serve it best for the future. We focus on the unavoidable uncertainty regarding the underlying parameters that characterize the world oil market (price elasticities, income growth rates), and the sensitivity of discounted OPEC revenue to changes in these parameters, for various pricing strategies. In 1979-80, OPEC chose a high-price strategy, which could have yielded good results (like many other price-paths) if the market's underlying parameters had been more favorable. But the price elasticities of demand and non-OPEC supply were much higher than anticipated, so that OPEC did very poorly-not only in absolute terms, but also relative to what it could have achieved if it had set its price more cautiously. We search for a robustly optimal strategy for OPEC in the future, which will serve it well relative to other strategies, regardless of the true parameter values underlying the market (within some plausible range). We conclude that OPEC's interests will be served best by a policy of moderate output growth, at a rate no faster than that of world income growth. This will require that OPEC slow its rate of output growth since 1985, cutting it at least in half. Slowing its output growth will allow OPEC gradually to regain the market share lost after its disastrous 1979-80 price doubling, but without jeopardizing its revenue, as might a policy of more rapid increases in output. This will yield a consistently good result for OPEC, relative to alternative strategies, over a fairly wide range of demand and supply conditions.





The Asymmetric Effects of Changes in Price and Income on Energy and Oil Demand

Dermot Gately and Hiliard G. Huntington

Year: 2002
Volume: Volume23
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol23-No1-2
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Abstract:
This paper estimates the effects on energy and oil demand of changes in income and oil prices, for 96 of the world's largest countries, in per-capita terms. We examine three important issues: the asymmetric effects on demand of increases and decreases in oil prices; the asymmetric effects on demand of increases and decreases in income; and the different speeds of demand adjustment to changes in price and in income. Our main conclusions are the following: (1) OECD demand responds much more to increases in oil prices than to decreases; ignoring this asymmetric price response will bias downward the estimated response to income changes; (2) demand's response to income decreases in many Non-OECD countries is not necessarily symmetric to its response to income increases; ignoring this asymmetric income response will bias the estimated response to income changes; (3) the speed of demand adjustment is faster to changes in income than to changes in price; ignoring this difference will bias upward the estimated response to income changes. Using correctly specified equations for energy and oil demand, the longrun response in demand for income growth is about 1.0 for Non-OECD Oil Exporters, Income Growers and perhaps all Non-OECD countries, and about 0.55 For OECD countries. These estimates for developing countries are significantly higher than current estimates used by the US Department of Energy. Our estimates for the OECD countries are also higher than those estimated recently by Schmalensee-Stoker-Judson (1998) and Holtz-Eakin and Selden (1995), who ignore the (asymmetric) effects of prices on demand. Higher responses to income changes, of course, will increase projections of energy and oil demand, and of carbon dioxide emissions.



OPEC's Incentives for Faster Output Growth

Dermot Gately

Year: 2004
Volume: Volume 25
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol25-No2-4
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Abstract:
This paper addresses the question of whether OPEC producers are likely to expand their oil output substantially over the next two decades more than doubling in the Gulf countries by 2020. Such projections, made by the International Energy Agency (IEA) and the U.S. Department of Energy (DOE), are not based on behavioral analysis of Gulf countries decisions, but are merely the residual demand for OPEC oil the difference between projected world oil demand and Non-OPEC supply, given some assumed price-path. I employ a simulation model to compare OPEC s payoffs from faster or slower output growth, under various parametric assumptions about the responsiveness of world oil demand and Non-OPEC supply to income and price changes. The payoffs to OPEC are relatively insensitive to faster output growth; aggressive output expansion yields slightly lower payoffs than just maintaining current market share. Analysis of intra-OPEC decisions between the Core countries and the others suggests a similar conclusion: these two groups are engaged in a constant-sum game. Thus, the significant increases in OPEC output projected by IEA and DOE are implausible.




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