Twodifferent opinions have been shared concerning whether the demand offuel is inelastic or elastic however, fuel should be considered tohave inelastic demand.
Thoseof the opinion that fuel has elastic demand argue that consumers arelikely to find ways of conserving fuel and substitutes, when theprice of fuel rises. For example, when the prices of fuel shoots up,consumers would tend to use cars that consume less fuel in order tospend less fuel also, consumers tend to insulate their houses aswell as employing other conservation measures. Therefore, accordingto their argument, these measures decrease the quantity of fueldemanded. Hence, a change in price has a moderately large impact onthe amount of fuel demanded according to the opinion of thoseclaiming fuel has elastic demand.
Onthe other hand, those supporting the claim that fuel has inelasticdemand argue that fuel has inelastic demand because it is a necessityand has no substitute. Despite an increase in price of fuel, thequantity of fuel demanded would not change by significant amountssince people will still need fuel for transport and other uses(Arzaghi & Squalli, 2015). Therefore, there are nosignificant changes in the way consumers demand fuel even if there isan increase in fuel.
Althoughconsumers may tend to use fuel conservation measures, when there isan increase in fuel prices, the quantity demanded would decrease bymeager amounts. Zumbrum (2015) argues that, when oil pricesincreasing in 2011, the IMF estimated that a 10% increase in pricecontributed to a 0.2% decrease in demand for oil (Zumbrum, 2015). Thesame case holds, when there is a drop in fuel prices the quantity offuel demanded would not increase by significant amounts. Thus, thedemand for fuel would always remain inelastic since it will alwaysremain a necessity and there are no substitutes for fuel, onlyconservation measures can be used. Besides, Hwang et al (2011) pointout that the demand is inelastic because of long lead times forchanging the stock of fuel-consuming equipment (Hwang et al., 2011).
Arzaghi, M.& Squalli, J. (2015). How price inelastic is demand forgasoline in fuel-subsidizing economies? EnergyEconomics,50,117-124.
Hwang,M., Yang, C., & Huang, B. (2011). Oil price formation throughunstable, inelastic demand and cartel imperatives. TheJournal of Energy Markets,Vol. 3 (4), 65-164.
Zumbrum,J. (2015). Oil’sPlunge Could Help Send Its Price Back Up.TheWall Street Journal.