Conservation of Resources: Prices Change Everything

Michael Giberson

Steven Stoft, at the EU Energy Policy Blog, observes that market driven conservation is a slow process:

Conservation is the main way consumers respond to high market prices. When price goes up, consumption comes down–but it takes a while for the full price effect to play out.

Market-driven conservation is a slow process–slow to get going and even slower to stop. Looking at recent high oil prices, people noticed that gasoline use was slightly higher in 2006 than in 2005, and many concluded that higher prices were not working to curb gas consumption. People thought the same in 1974, when the price of oil tripled and world oil consumption fell only 1 percent.

Market-driven conservation starts slowly because the best way to conserve is to switch to better technology. People don’t buy cars and refrigerators until they need new ones, and companies take years to design new, more efficient models. It wasn’t until 1980 that changes in technology began to pay off.

After 1980, oil prices went on a sustained nosedive, but, Stoft observes, the conservation effects of consumers choices in response to the higher prices continued to be felt.

Stoft also notes the broad power of prices:

The power of price lies in its ability to act in a million ways at once, many unexpected. Even when price directly affects people, they don’t always recognize it. … Even the energy gurus of the physics camp, who now push for stricter standards and ignore energy prices, owe their careers to OPEC’s high prices. I say this not to belittle their work, but to point out how fundamental and varied the price effect is. Price changes everything. And the whole world responded to OPEC’s high prices.