Increasing the efficiency with which a resource is used can INCREASE demand.

Posted By: Russell
Date: 6/12/08 9:39a.m.

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With oil prices at $130/bbl, I often hear that increasing efficiency is one way to lower demand. 'Tain't necessarily so. The more efficiently an economy uses a resource, the more economic uses it finds for that resource. Which means that improved efficiency sometimes leads to increased demand. Which isn't to say that improved efficiency is a bad thing. If we all had cars that got 100 mpg, $4/g gasoline to fuel them would seem not too bad. Which means we likely would drive more, and drive up the price gasoline even higher. That would be fine for driving, but I doubt truckers or shippers would see the same efficiency increase, since those modes of transportation already are very efficient. That also is why someone long in oil and gas might look with pleasure on Tata's delivery of the Nano, a car that sells new in India for $2,500, and gets 50 mpg. More efficient cars mean more people driving in the world that couldn't previously afford to do so. And that means more demand for oil. Time is an important factor here. Immediate efficiency increases do lower demand. If one of those gizmos sold in the back of magazines that promised to boost gas mileage actually worked, it wouldn't right away change the cars people bought, or the trips they had planned in the next week. But capitalist economies respond quite quickly to technological changes. The fact that increased efficiency of a resource can lead to higher demand for that resource and higher prices for it has to do with what happens after those efficiency gains are made. (In contrast, the law of supply and demand concerns counterfactual alternatives at one point in time. But that's another topic.) For a longer explanation with historical background, the link goes to the Wikipedia article on Jevons paradox. It's really a counter-intuitive observation, rather than a paradox. Jevons was the British economist who first documented and explained it. Well... I thought I'd do my part to explain how capitalism works. Even though that seems to mark one as a "radical leftist" these days.