How Long Can Energy Price Shocks Last?

Energy price, especially the oil price, is keeping going higher. Today, the oil price reached a price of $78 per barrel. Many think that the high oil price will change the normal behaviors of consumers. The reasoning behind this thinking is that the price of gasoline is about $3 per gallon, which is about twice the number a few years ago. So people will go shopping less or combine their trips to shops. People will reduce their other discretionary spending such as restaurants, clothing, or sports events. However, I consider this change of consumer behavior temporary and short-lived. People can change their normal behaviors at the begging of a shock. Then the shock impact will be gradually reduced over time. So the initial shock impact will eventually goes away.

There is a Chinese saying “for ten years one is afraid of well ropes once bit by a snake.” Chairman Mao said that “There will be another cultural revolution in seven or eight years.” These quotes indicate that the shock-behaviors of initial impacts will gradually return to normal behaviors. The seven, eight, or ten years are just an indication how long the initial shock-behaviors can last. But the true human nature will eventually take place when the impact of initial shocks is decaying away.

Another economic rebalancing effect of the high oil price is the development of alternative energy sources such as nuclear power, wind power, solar power, coal-fueled power, and hydroelectric power. Although some of these alternative energy sources may take long time to develop, but the effect can be felt long before the actual completion of these alternative energy sources.

Based on this kind of thinking, the current worries about the hyper-inflation, stagflation, or even a slowing down of consumer purchasing power will eventually evaporate over time. These worries will be proven short-lived when people return to their truce nature and the effects of alternative energy sources are felt.