Energy demand and consumer price expectations

Abstract

Energy demand, and in particular the demand for liquid fuels is only moderately growing despite the dramatic price reduction since the beginning of 1986. Different reasons are conceivable to explain this observation, e.g., irreversibility of technological progress, sluggish behaviour due to substantial adjustment costs and the expectation of another price increase in the near future. This paper addresses the last two points, in so far as adjustment costs and price expectations may explain the current market situation. The theoretical discussion confirms that the anticipation of future price increases dampens the current rate of demand increases and implies demand reductions prior to the actual price increase. However, the empirical application (transport sector) indicates that expectations (of another price increase in the future) may at best explain only a small fraction of the observed asymmetrical demand behaviour.