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February 26, 2008

Did we respond to oil prices?

If we see the price of beef go up, we may buy more pork or fish. We try to find substitutes for things that become more expensive. But does this strategy work with oil? In response to the big increases in oil prices last year, did we see purchases of oil fall? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, one reason why it may be different with something like oil and, of course, its major derivative gas, is that there aren't any easy substitutes for gasoline. We're not going to be able to go and use hydrogen fuel, for example, at least not now. Furthermore, we constantly see our population going up, and also the number of vehicles keeps increasing. So those two factors also would probably result in us using more oil and gas even in years when prices go up. But what you want to do is look at the amount of oil and gas used per person. And actually here we see that in 2007, that went down in the U.S. So it actually conforms to what you would predict when the price of something goes up, in this case, oil. The amount of oil and gas that people use per person went down. The same thing happened if you look at other developed countries, like in Western Europe and Japan. What was different in 2007, however, when you look at worldwide oil and gas use, is that we saw consumption go up significantly among developing countries, particularly China and India, because they are very fast growing. So I think that our behavior and the behavior of developing countries certainly conforms to what you would predict out of economics. For other countries, it is simply because they are growing so fast they are using more oil and gas."

Posted by Dave at February 26, 2008 08:36 AM