Harry Veeder wrote:
In the case of gasoline I wonder if there is a danger that rising prices
will boost consumption.
The psychology of aggregate demand might work like this:
"Since gasoline will cost more in the future, it is better to buy more
today. BUT, with more in our tank, we can drive further!
In other words, from a macroeconomic standpoint does the fullness of the
aggregate tank determine the rate of consumption of gas more than the price
of gas?
I doubt this would cause a measurable problem. However, in the 1973 gas
crisis, similar behavior did cause a measurable but short-lived problem.
People lined up at gas stations and waited for a long time. Some of them
left their engines idling. Other people filled up frequently, even when the
tank was mostly full, which again caused long lines.
This kind of idiotic behavior usually does not last for long. It was caused
by shortages, not high prices. People are not going to line up for high
priced gasoline.
I can imagine one scenario in which this behavior might occur:
hyperinflation. This would affect not only gasoline but everything else. In
Japan after World War II, the prices of food and other goods sometimes
increased several percent per day. There was a popular song on the radio
about riding the train and finding the cost of oranges higher at every
station. If something like this happens people will buy up everything they
can find before the money becomes worthless, and they will hoard goods.
Since oil is used to produce just about every product on earth, if the
price of oil suddenly jumps to several hundred dollars per barrel we
probably will see hyperinflation. This could happen in the event of a major
catastrophe in the Middle East, such as a revolution, war, nuclear attack
on the Saudi oil fields, or something similar. I think it is entirely
possible, but not likely.
- Jed
