World Energy Outlook 2006

the overall price of that service, a key component of which is the cost of the fuel
used to provide it (Figure 11.10). How sensitive the demand for a given fuel is
to changes in its effective price to the consumer (including taxes) depends,
therefore, partly on the ease with which the consumer can forgo the service or
switch to a cheaper fuel, and the share of the price of the fuel in the total cost
of providing the energy service. The larger the share of fuel in the overall cost
of providing an energy service, the more sensitive the demand for that service
– and, therefore, the fuel itself – will be to fuel prices.
* Including taxes and subsidies.
Figure 11.10: The Link between Fuel Price and Demand
In economists’ parlance, the sensitivity of demand to changes in price is
known as the price elasticity of demand. Under normal conditions, demand
for an energy service and the fuel used to provide it will be higher as the price
of that fuel falls; in other words, the own-price elasticity of demand is negative.
Where it is possible to switch fuels, demand will also be affected by the prices
of other fuels. The sensitivity of fuel demand to changes in other fuel prices,
known as the cross-price elasticity of demand, is typically positive, as demand
for a given fuel will rise as the price of a competing fuel increases. Assessing the
sensitivity of demand to price changes in the short and long term is
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