David R. Henderson  

Gasoline "Demand:" Find the Flaw

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If the Department of Energy is to be believed, weekly gasoline demand has fallen 7% on average from a year ago, to its lowest level since 2001.

But few market observers believe it.

The Energy Information Administration's weekly report on U.S. gasoline demand has for years been the most-watched measure of gasoline usage. Analysts and economists use it to make projections, and traders use it as a gauge of when to buy or sell.

But many analysts say the recent data are flawed. They say the data suggest American drivers this year, based on the average of weekly figures, have cut back at the pump by 622,900 barrels a day from a year ago, the equivalent of Argentina's entire daily consumption. The U.S. economy is gaining steam, they argue--nonfarm payrolls rose 1.6% in February--and while high gas prices probably are eroding demand, it wouldn't be by that much.

This is from a news story, "Questions Arise on Gasoline Data," by Carolyn Cui, in this morning's Wall Street Journal.

The news story is not about demand at all, but about something else. And by making it look as if it's about demand, the reporter confuses an issue. It's an issue that someone who really paid attention in an introductory microeconomics class would see clearly.

So here's a test of your basic understanding of microeconomics:
(a) The first two times in the above quote that Ms. Cui uses the word "demand," she really should use another word. What is that word?
(b) The third (and last) time she uses the word "demand," she really should use a two-word term. What is that term?
If you want to illuminate things for your fellow readers, then, as co-blogger Bryan would say, "show your work." I.e., explain.

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COMMENTS (14 to date)
AMW writes:

(a) "Consumption." Demand is the full relationship between price and quantity demanded, so it can't fall by a certain percentage.
(b) "Quantity demanded." See work above.

Also, the statement "high gas prices probably are eroding demand" is nonsensical. Demand does not react to changes in current prices. Expectations of future prices affect current demand, but the relationship is opposite what is implied above. I.e., high expected future prices increase present demand.

Daniel Kuehn writes:

Argh - I hate this. People do this all the time when they talk about the science and engineering labor market too.

This is one of the toughest things to get our freshman to think about: demand vs. quantity demanded, and movement along a curve vs. movement of a curve.

David R. Henderson writes:

AMW and Daniel Kuehn,
Congrats! A+! I don’t mean to sound patronizing to you, AMW and Daniel. I’m just glad that someone else saw it too. This will now be my go-to example, and possibly a short problem on a problem set, to test students’ understanding.

Dave Churvis writes:

Just to expand on AMW's answer:

  • Demand is the schedule of what quantity of a product consumers in the market for that product would buy at a given price.
  • Consumption is the statistic showing how much of a product was actually bought during a given period of time.
  • Quantity demanded is simply the reading of how much the current demand schedule indicates at a given price. The price of a product cannot affect the demand for that product, only the quantity demanded. Factors extrinsic to the product's price are the only thing that can affect the demand.
David R. Henderson writes:

Excellent. One little hedge: the amount bought and the amount consumed can differ, but usually by a small amount. Interestingly, though, when a friend and I in grad school were writing a piece on gasoline price controls in 1973, we contacted a major oil company for some data. I’ve forgotten which, but I think it was Union Oil. They couldn’t answer a key question we needed an answer for because they told us they didn’t know that week the average amount of gasoline people had in their gas tanks. In other words, how much were people building or depleting inventories.
BTW, I appreciated your post about suicide. My 22-year-old brother committed suicide when I was 19.

Alex J. writes:

Re: amount bought differing from amount consumed:

Farmers can often store large amounts on their inputs on-farm, as a form of price hedging. E.g. a large gas tank for filling his trucks and tractors. When the price is high (or has recently increased), he may draw down his supply, consuming about the regular amount while buying nothing. When the price is low he buys gas to fill it back up.

Ken B writes:

@all economists: I count this as partly an own-goal. Is 'demand function' or 'demand curve' REALLY so much harder to say than 'demand'?

Even if it is, when you set the reporter straight it will be clearer and more persuasive if you say something like "you were tripped up by the ambiguity in the way people use the word demand for two different ideas ..." rather than "but demand means ..."

OK, I'm done grumping.

Dave Churvis writes:

@David, Alex: Thanks for the response! I was under the impression that once a product was purchased, it's considered "consumed", but thinking about it a bit more I see the flaw in that logic: just because you've purchased something doesn't mean you're actually going to use it immediately. So to synthesize it further, would the following be a reasonable statement?

"Demand and quantity demanded relate to consumers' intent to purchase a product before they have purchased it, while consumption relates to consumers' actual usage of a product after they have purchased it."

If this statement is correct, what is the name of the variable that indicates how much consumers have bought, whether consumed immediately or not?

I apologize if this is a particularly basic question, but I think I've always found the concept of "consumption" to be rather nebulous the way most people talk about it.

@David: I'm glad you appreciated the post, but I'm of course very sorry for your loss. I've never personally known anyone who's taken their own life, but it always makes me sad when I hear about it.

Karl writes:

To be far to the reporter, the second usage is not that off from the way people in the industry use the term "demand" and its not clear that there is an obvious basic economic term.

More specifically, its exactly what AMW addresses. It is in fact the case that expected high future prices of gasoline decrease current demand for gasoline.

Moreover, future price expectations are a function of current prices and their path.

The common term for this in the industry is "demand destruction" and what it implies is that when consumers observe high prices for an extended period they conclude that prices will remain high and this leads them to more dramatically cut back on consumption today and invest in alternative capital.

I don't think there is an easy way to say this with basic economic terms.

David R. Henderson writes:

@Dave Churvis,
"Demand and quantity demanded relate to consumers' intent to purchase a product before they have purchased it, while consumption relates to consumers' actual usage of a product after they have purchased it."
Not quite. The most accurate is the way you first put it, with one little change: in your explanation of “consumption,” change “bought” to “consumed” or “used.”
Re my loss, thank you.
To be fair to the reporter, the second usage is not that off from the way people in the industry use the term "demand" and its not clear that there is an obvious basic economic term.
Actually, the basic economic terms are quite clear, and with the little edit I did in this comment to Dave Churvis’s version, that is the way to do it.

jh writes:

This same misuse of the term "demand" (and "supply") is what leads people to say things like, "There just has to be something other than Supply and Demand at play here. Supply and Demand doesn't explain these prices."

What they fail to understand is "Supply" and "Demand", in economics, includes EVERYTHING, by definition. Demand = the sum of all the buyers' preferences. Supply = the sum of all the sellers' preferences. There is nothing else. Anything affecting a price can be categorized in Supply or Demand.

But, most people haven't studied econ and they use "demand" to explain something different. I generally take one, maybe two, shots at explaining to someone how they are misusing the word and then give up and just accept their definition in regards to that particular conversation. Nothing like arguing about economic definitions with someone who has never taken an econ class.

David R. Henderson writes:

What they fail to understand is "Supply" and "Demand", in economics, includes EVERYTHING, by definition.
Well put. So when I see O’Reilly and Dobbs beating on speculators as if they’re not part of demand or supply, I wonder what think speculators do.

Pete the pedant writes:

[Comment removed for supplying false email address. Email the webmaster@econlib.org to request restoring this comment. A valid email address is required to post comments on EconLog and EconTalk.--Econlib Ed.]

Greg Jaxon writes:

Price going up, consumption dropping, other economic indicators positive... this suggests that the marginal productivity of gasoline has increased: i.e. people are driving to work, not to the unemployment line.

Does anyone publish the discount rate on bills in the fuel oil supply chain?

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