Common Tragedies

Thoughts on Environmental Economics

Cross-price elasticity: conservation vs. oil

Posted by Evan Herrnstadt on June 24, 2008

As I emerge from a long hiatus (Argentina and catching up with work upon my return), I’m going to ease back into blogging with a very brief econ 101 post.  Hopefully my economic intuition and vernacular aren’t too rusty (feel free to tear into this post* — it’s the only way I’ll get back in stride).  From the LA Times:

John McCain returned to Santa Barbara this week not to assert his opposition to offshore drilling — as he did when he ran for president in 2000 — but to make the calculated gamble that high gas prices have trumped voters’ desire to protect the environment…

We talk a lot about the environmental benefits of higher fuel prices as people change their lifestyles to reduce their consumption of fossil fuels.  However, it’s easy to forget that in some locales, the opportunity cost equation for environmental protection can include increased oil supply.  Essentially, conservation and fuel are an odd sort of complements.  When the price of fuel goes up, the demand for environmental protection curve shifts inward.  In the past, it seems that this cross-price interaction has been relatively inelastic, but this might be changing as we arrive at new reaches of the fossil fuel demand curve:

Los Angeles Times polls show that, in California, opposition to offshore drilling has not weakened even during past energy crises. But new national polls have shown that the country, burdened by exploding gas prices, supports drilling in sensitive areas.

Keep in mind that the impact on world oil prices from drilling in specific sensitive areas is likely to be small and somewhat temporally distant (see: ANWR), but this fact can easily be obscured by rhetoric and poor information.  Luckily, politicians usually try to stay away from those kinds of things…

*I’m guessing Daniel and I might not be friends anymore by this afternoon.

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One Response to “Cross-price elasticity: conservation vs. oil”

  1. Daniel Hall said

    Having lived in Santa Barbara, I literally cannot imagine a gas price sufficiently high to make offshore drilling popular in Santa Barbara. Of course, as you point out, you can probably find lots of people in, say, Florida who think we should be drilling off the California coast. And vice versa.

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