World Energy Outlook 2006

complicated by the role played by other factors, notably income, climate,
lifestyles, investment cycles, technology, price expectations and government
policies.
Energy price elasticities vary widely by fuel, sector and region. In all cases,
demand responds in a gradual fashion to a shift in price, as changes in
behaviour occur and new investment is made in energy-using equipment in
response to the new price environment. Thus, elasticities are generally much
higher in the long term than the short term: the impact of a permanent shift
in price is typically greater the longer the period examined.
Movements in price often have little immediate effect on demand, because
consumers may not expect the price change to persist or because it is difficult
or expensive for consumers to switch to other fuels or change their energy
equipment. This is especially true for transport fuels. Few practical
substitutes are yet available for oil-based fuels for cars and trucks, so demand
for these energy services tends to be relatively price-inelastic in the short
term. However, if fuel prices have risen and are expected to remain high in
the longer term, end users have a strong incentive to opt for more fuelefficient
models when replacing an existing vehicle. Similarly, only electricity
can power electrical devices, so demand for electricity is highly price-inelastic
in the short term. End users may nonetheless change their behaviour so as to
use less of a particular energy service in response to higher prices. Different
fuels – gas, coal and oil products – can provide non-electricity stationary
services (such as fuel for heating boilers), so demand for these fuels in these
sectors is generally more sensitive to changes in price, especially where multifiring
equipment is widespread. Power generators may also be able to switch
more quickly to cheaper fuels if they have dual-firing capability or spare
capacity.
Oil demand is relatively insensitive to movements in crude oil prices, especially
in the short term. As the last section demonstrated, this is in large part because
changes in crude oil prices lead to smaller percentage changes in local prices to
end users – particularly for road-transport fuels. The weighted average crude oil
price elasticity of total oil demand across all regions is –0.03 in the short term
and –0.15 in the long term, based on econometric analysis of historical
demand trends (Table 11.3). In other words, a permanent doubling of the
crude oil price would be expected to cut oil demand by about 3% in the same
year and 15% after more than ten years, were these elasticities to remain
constant and all other factors to remain equal.
Elasticities are even lower for transport fuels, because fuel accounts for a smaller
part of the total cost of using a vehicle. Fuel-price elasticities are generally
highest in countries with low taxes, as final prices respond more in percentage
terms to changes in crude oil prices (Figure 11.11). As a result, overall crude oil
286 World Energy Outlook 2006 - FOCUS ON KEY TOPICS
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