Manyeconomists are convinced that fuel has a relatively inelastic demandcurve. For the purposes of this report fuel will be tantamount topetroleum. ThePetroleum market is atypical because in demand in the short run ismoderately inelastic. Irrespective of the cost of fuel in the market,it is not possible to switch immediately to another form of energy tofuel our automobiles, cooking and lighting (Kilian,2009).In the same vein, airplanes and ships cannot stop using jet fuel anddiesel to another form of propulsion. Also when the weather patternchanges, and it is freezing cold, individuals need to heat theirhome, the only choice would be to pay more for the heating fuel(Kilian & Murphy, 2014). Similarly, if the cost of the fuel(gasoline) was to go down by half, individuals would not drive twiceas a far as they used to when the price had not fallen, or for thatmatter turn the thermostat for more hours (Kilian & Murphy,2014).
Fuelis a commodity that most people need in certain amount every day,every week. Fuel prices can shift every month, and if there is ashortage the prices will undoubtedly skyrocket. Even at this higherprice people will still buy the fuel because it is not possible tochange habits immediately (Stonebraker, 2015). For example, in theshort run there are very limited substitutes for petroleum. Thediagram below shows the moderately inelastic demand curve for fuel.
Source:Kilian & Murphy (2014)
Inthe diagram it is visible that if the price of one gallon ofpetroleum increased by ten percent from $1 to $1.1, the quantitydemanded would decrease by a margin of 5 percent, from 20 gallons to19. The elasticity of demand is 0.5, which signifies that for every1% increase in the price of petrol, the amount demanded woulddecrease by a half. This shows that in the short run the demand forgasoline (fuel) is relatively inelastic.
Kilian,L, and Murphy, D.P. (2014), “The Role of Inventories andSpeculative Trading in the Global Market for Crude Oil”, Journalof Applied Econometrics, 29(3), 454-478
Kilian,L. 2009. "Not All Oil Price Shocks Are Alike: DisentanglingDemand and Supply Shocks in the Crude Oil Market." AmericanEconomic Review,99(3): 1053-69
Stonebraker,R. J. (2015). WinthropUniversityDemand and Supply Applied: Oil Prices.Winthrop University. Available at:http://faculty.winthrop.edu/stonebrakerr/book/oilprices.htm[Accessed on 26/6/2015]