Some economic interactions are like snapping a whip. A brisk shake at one end translates into an explosive snap at the other.
The effects of higher fuel prices on prices of old cards and airlines demonstrate this.
Relatively small changes in fuel prices force big changes in the values of used machines with high fuel consumption. This exemplifies what economists call “demand shifters.”
Demand shifters are factors, other than the price of the good, which change the quantities of some good that people are willing to buy. The price of beef goes up and people buy more pork and chicken.
A report says that hominy grits reduce cancer and people rush to eat more grits. April and May are cold and rainy, and swimming suit sales drop. Demand shifters are ubiquitous.
Sometimes a change in the price of one good has different effects on what appears to be one general group of products.
The effects of fuel prices on airliners and automobiles are such a case. For owners of both, fuel costs are relatively large compared to purchase price, but this fuel-to-purchase cost ratio varies widely between models.
In the five years since my wife and I bought a used Toyota Camry, we have bought gasoline totaling about a fourth of what we paid for the car.
Had we purchased a new Camry, our expenses for 60 months of fuel would have been a seventh of the purchase price.
In contrast, in each of the two years since I bought a 12-year-old Ford half-ton pickup, I have spent nearly as much on gas as I paid for the vehicle. For airliners, fuel costs relative to purchase can be even higher than for cars.
When gasoline prices increase as they have in the past two years, demand for gas guzzlers plummets.
Near our house is a charity that accepts donated vehicles. Whenever gasoline prices spike, its lot burgeons with old full-sized sedans. Market demand for such vehicles drops so much that many sellers simply donate the old barge instead of trying to sell it.
At the same time that demand for large vehicles slackens, the demand for small, high-gas-mileage vehicles picks up sharply. Good mileage becomes a more important consideration for anyone buying a different car. Used Geo Metros and new Mini Coopers sell like hotcakes.
The same is true for airplane manufacturers. The crushing effects of high oil prices on airline profitability are well known. But despite tough sailing, higher oil prices can raise sales for Boeing and Airbus.
When fuel costs are low, the carriers can fill any need for more planes by pulling used ones out of \desert storage in Arizona.
When they are high, as they are now, however, it can make more sense to buy a new machine with higher fuel efficiency than to put a thirsty old bird back in service.
© 2004 Edward Lotterman
Chanarambie Consulting, Inc.