15 January 2013

The impacts of cheap energy

Gasoline and diesel are subsidized in Malaysia and Brunei (where you can buy 16 liters -- over 4 gallons -- of diesel for the same price as an espresso; see photo).

The implications of cheap prices are obvious -- people use more fuel -- but they manifest in interesting ways.

First, you have the fact that many people sit in their cars, engines running to keep the AC on, reading books, talking or sleeping.

Second, Malay gas stations try to maximize their sales volume, since the government monopoly sells them fuel at a fixed cost (RM 1.73) and also controls sales price (RM 1.80 per liter is EUR0.45/liter or $2.23/gal).

Third, prices do not vary, so people neither shop around for lower prices nor pay attention to how much fuel they use -- their price elasticity, in other words, is zero. This makes any attempts to increase prices (a political decision) very controversial, since a change in price is likely to directly reduce income instead of modify quantity demanded.

(I'll get to cheap hydropower and deforestation after I've left Malaysia.)

Bottom Line: Political control of gas prices, in other words, has converted fuel from a private, economic good into a common pool, political good that is leads to fiscal and energy waste.

5 comments:

  1. That bolded stuff in your "Third" point is in error David. The price elasticity of demand is not affected by whether price changes or not.

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  2. According to Ian Roberts of the London School of Hygiene and Tropical Medicine, the overall obesity rate is highest in the United States among all other nations because the price of gasoline is very low.

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  3. @Ron -- what's the elasticity when nobody pays attention to price?

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  4. So you're claiming that if price dropped by a nickel from its current $2.23 per gallon, there would be no increase in quantity demanded. That would be shocking, and it would mean that gasoline is unique among all commodities. If the current price was so low as to not matter to household budgets, perhaps such a claim could be close-to-true (yet not), but I'd guess $2.23 is a significant price in Malaysia.

    I wonder how many times I've heard inferences or direct claims that water rates don't affect water use, thereby dismissing an important policy tool.

    What do folks smoke over there anyway? Are you accidently getting some second hand;)?

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  5. @Ron -- much to my regret, Malaysia and Indonesia have the death penalty for the fun drugs, so it's only beer here.

    I agree with you about price elasticity WHEN prices are relevant, but there's a certain hardening that occurs when the price is fixed and people "get into the habit" -- does that make sense? More important was my other point -- that fixed prices are political, not economics, which makes changes controversial.

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