Vikram Saxena

The Era of Cheap Crude Is Ending

A lot of people are writing about the Tata Nano and oil demand. What they miss is that the Nano is a replacement vehicle which gives better mileage than the two-wheelers it will replace. Plus it can carry 2x the load of the two-wheeler. The person buying the Nano will be replacing one or two two-wheelers and is likely to consume less gas.

Another aspect to keep in mind is that folks in emerging economies spend a significant chunk on food and energy. They are very conscious when it comes to spending on energy and even a 5-10% difference in mileage will sway their choice regaring the vehicle they use. The emerging economies have a lot of demand elasticity built in to the system; consumers there will adapt to higher prices quickly.

In developed economies the percentage spent on food and energy is much less than that spent in emerging economies and hence the demand elasticity is limited. Further the lifestyle changes needed to reduce consumption are much tougher in the developed world compared to the emerging markets where attitudes and trends are still evolving and can adapt easily.