Threshold of Elasticity is a special type of price threshold, referring to the price point where a good which was initially considered to have inelastic demand characteristics begins to show signs of markedly increased demand elasticity. In practical terms related to gasoline, exceeding the Threshold of Elasticity for gas pricing means that consumer fatigue sets in and millions of Americans start making all those little individual decisions that will result in using less gasoline. In the summer of 2008 the apparent Threshold of Elasticity for 87 octane unleaded gasoline was $3.85USD/US Gallon. During the deepest part of the recession, the apparent threshold of elasticity for 87 octane unleaded appeared to fall to around $3.00 USD/US gallon. Recent increases in oil prices and demand for gasoline have once again pushed gas beyond the $3/gallon mark, and it is probably not coincidental that during the period when gasoline prices starting rising again, consumer spending fell off.
It's no secret that when gas prices go up, consumer anxiety also increases. Given the example of January's consumer spending figures, and ongoing high unemployment in this economy, one could speculate that there is an Inverse Demand Corollary in effect which has significant implications for Peak Oil theorists and traders in oil futures.
China/US Inverse Demand Corollary
Given that the EU Nations and the United States are currently the largest markets for Chinese made goods, it stands to reason that as oil prices are pushed higher, consumers in the EU and US markets will suffer from greater feelings of financial anxiety. Those feelings of anxiety may manifest themselves in a significant reduction in purchases at those big box retail stores which provide significant support to the Chinese manufacturing sector. As the Chinese manufacturing sector is weakened, China's economy is left with little more to fuel economic growth than a real estate bubble that makes America's recent sub-prime crisis look moderate. Therefore, although Chinese demand for oil does contribute to higher prices in the short term, aggressive speculation and energy inflation in the long term could create a downward spiral in the Chinese economy (essentially a chain reaction set off by US and EU consumer anxiety), thereby leading to significant downward pressures on prices in hydrocarbon futures.
The net effect of this theory is that we should see oil and other hydrocarbon futures largely mirror consumer spending. The greater the disparity in apparent trends between consumer spending and hydrocarbon pricing, the greater the eventual crash in hydrocarbon prices is likely to be.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
This article is tagged with: United States
