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In this paper, the differences between the price elasticity of demand for gasoline in the United Kingdom economy will be contextualised within the impact of the Covid-19 pandemic to highlight the current key differences historically. Case studies using different time slots will show the inequalities between those environments and the differing price elasticity of demand, mainly due to the variance of sufficient substitutes for transportation.

The novel coronavirus (emerging in late 2019, and rapidly gaining traction until the start of it’s peak impact around March 2020) caused many countries to mandate a lock down and had massive implications over the whole economy as well as for the lives of billions of people. Starting from the food supply chain to the income of nations, COVID has drastically changed the way we view elasticities of commodities such as petrol, coal or even energy.

An interesting behaviour that COVID triggered is the emergence of the work-from-home environment. Also, as the price of gasoline has increased in 2020-2021, fewer people were wanting to travel to the office as staying in the comfort of their home was cheaper and more desirable. Though this kind of behaviour has been more prevalent in developed countries where most of the people work in the services sector. However, the effect of the COVID pandemic has been tamed by government interventions, with subsidies coming from the Gross Domestic Product but also through several government initiatives by the current Prime Minister Boris Johnson and his chancellor of the exchequer Rishi Sunak.

The prices of gasoline are highly inelastic in demand. Taking an approach to compare certain cities where the rise of green transport such as bikes or electric scooters will point out that in the UK, the wealth of certain regions is negatively correlated with the demand for fossil fuels. In the case of London, the available substitutes for car journeys such as the underground, trains, bikes, buses or even walking are increasing the elasticity of demand for petrol. But a completely different situation is happening in Manchester where people have significantly fewer substitutes for transportation and are obligated to stick to gasoline. During COVID, workers who were implicated in industrial jobs had to travel to the warehouses or manufacturing facilities, therefore petrol companies had a competitive advantage to charge whatever price they wished for.

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Theoretical concepts: Price Elasticity of Demand

Price elasticity of demand (PED) is a measurement of how sensitive a good demand is to the price change of it. It is defined as percentage change in quantity demanded for one percent change in price. The law of demand defines that ceteris paribus, when the price of a product grows, the demand for that product will decrease. According to it, the value of PED is negative since the changes on price and quantity demanded behave inversely.

Depending on the value of PED, we have 3 different types of elasticity, elastic, inelastic and unit elastic: in terms of elastic PED (more negative than -1) a small change in price leads to a greater change in the quantity demanded, unit elasticity PED (equal to -1) leads in an equal change in the price and quantity and inelastic PED (less negative than -1) a large change in price causes a small change in the quantity demanded.

Recall the equation (1), the elasticity depends on the current price and quantity demanded, i.e., the current position on the demand curve. For a linear demand, the price elasticity of demand varies along the straight-line demand curve. The change of the price elasticity of demand also depends on external environment. Therefore, we will look into what impact on PED values.

Factors influencing PED

Nature of the good: If the good is a luxury with an elastic demand, the falling price will attract plenty of potential buyers to enter the market. Necessities have an inelastic demand, since no matter how much the price is lifted, people buy it anyway to meet their unavoidable need.

Availability of substitutes: The easier for consumers to have another substitute, the more possible it is for them to change their purchasing decisions. In this case, larger amount of the quantity demanded eliminates when the price of the product increases.

Price level of the good: A good standing in a low-priced position possibly has an inelastic demand. Conversely, a good with a high price can be considered as inelastic.

Income Level of consumers: In general, the upper-class spend a limited proportions of income on commodities and the price change of commodities will not trouble them. On the other hand, the budget of a low-income family is strongly affected by the price fluctuation on commodities, where the price elasticity of demand is very high.

Time: If the price of a good surges, in the long run, the demand for it becomes more elastic, since more time is given to consumers to realise the price hike and find a widely acceptable substitute. Additionally, consumers in the market also need some time to change their habits.

Real-life conflicts

Consumers’ tastes and preference: Some brands may make markable efforts on marketing and advertising. Consequently, they may establish strong brand loyalty among their consumers. That strengthen the inelasticity of their products and provide a higher PED value than expectation.

Giffen good: Usually, we observe negative PED values. However, there exists Giffen goods which describe a good with better sales given rising price and versa. Giffen goods violate the law of demands and obviously, obtain positive PEDs. For a Giffen good, there must be a lack of close substitute goods, and the goods must weigh substantially in the buyer's expenditure (Marshall & Rotton, 1890). Thus, due to the fear of the shortage of a Giffen good, the advancing price pushes up the quantity demanded.

United Kingdom: Oil producing country or importer?

The country is 90% self-sufficient in fossil-fuels (Goverment, 2016), which is one of the best in the developed nations. This puts the nation on a very interesting trajectory as technically the country is not affected by hikes in prices by other OPEC countries. Thus, the elasticity of petrol is more dependent on other considering factors as: substitutes, consumer preferences but also the income level of consumers. Even though the country is almost entirely sufficient on its oil resources, the UK Government fuelled the death of the industry by including more ways to travel such as train infrastructure (the HS1 and the developing HS2) but also the plans to increase the buying of electric cars through various grants and tax-reliefs for users.

How did the pandemic affect the elasticity of prices of petroleum in the United Kingdom?

During the 2018-2019 period, the elasticity of petroleum in the United Kingdom was equivalent to -13.99 since volumes have decreased by 2% and the prices have risen by 0.14% (Experian, 2020) . It is important to note that this figure is being driven up by the important concept of alternative transport. Buses, the underground, trains all serve as excellent substitutes as the infrastructure permits people to give up their fossil-powered vehicles. Therefore, more people were transitioning to electric cars or alternative modes of transport, this has increased the elasticity of demand for fuels like gasoline to rise in a very dramatic way. People in cities such as London have been very sensitive to price increases in this commodity, therefore choosing the cheaper alternative.

Fig. 1 UK Petrol elasticity of demand 2018-2019

However, the pandemic has changed the situation, during the 2019-2020 period the elasticity of demand for petrol was -0.69, while volumes increased by 5% and the prices dropped down by -8% (PRA, 2020). This points out an unusual behaviour of the market, considering that no alternative was possible for the people who used fuels. Consumer preferences linked to COVID have affected the elasticity of the product, since most of the consumers who used the personal vehicle were making this choice to protect themselves from the pandemic. Buses and public transportation were regarded as being less safe, less fitting as a substitute for cars in the pandemic (Kim Suji, 2021). Dynamically speaking, the change in health and safety gave more power to petrol suppliers to raise the price making the product very inelastic for the people which demanded such services.

The reduced demand for such products resulted in an increased stock of fuel that needed to be sold by retailers, introducing lower prices (UK Goverment , 2020) to drive up sales. To further cope with the increased stock, most of the petrol retailers have been stopping deliveries coming from other countries until the supply will normalise.

Some of the sectors of the economy including HGV transports were not affected by the COVID pandemic as grocery stores and other facilities needed to get their goods in time and cope with the increased demand for household goods. Therefore, lorry and medium vehicles petrol consumption didn’t get affected. Given the situation, the producers of petrol could charge HGV and lorry companies even higher prices without seeing a considerable drop in the quantity of fuel sold. This behaviour was also fuelled by the crisis of HGV drivers, increasing the panic buying behaviour of car users which would have paid more at every conceivable price (Sheppard, 2021).

Fig. 2 UK Petrol elasticity of demand 2019-2020

How does the 2020 change compare historically?

This section of the essay will focus on tracing a similar hike historically in which the price elasticity for petrol in the United Kingdom suffered significant fluctuations. With the objective of stablishing a parallel to the Covid-19 situation in the UK where the elasticity for petrol changed significantly, this part of the research paper will analyze the changes in vulnerability and resilience of the UK that are behind demand shocks and the availability of substitutes and other energy sources.

In the United Kingdom, during the period of 1950-1980 the price elasticity for automobiles fuels remained quite inelastic (long-run = -0.6 / short-run = -0.24). Although the results point out to inelastic outcomes, European countries tend to have higher price elasticity for petrol and its derivatives, usually above the unite, since there are many substitution alternatives concerning transport fuels (when petroleum prices rise, consumers may opt for other energy sources such as diesel and gas). Additionally, consumers in the United Kingdom may also transition to other types of transportation or switch expenditures to activities or goods that compete with transportation (Glaister, 2002).

Since the 1920s, except for the period above-mentioned, the vulnerability to fuel fluctuations has decreased significantly in the United Kingdom due to the transition to petroleum. Although the UK showed a lower vulnerability to price fluctuations, the trend could be observed globally. Despite the price hike for fuels in the 1980s and during the 2008 financial crisis, the United Kingdom’s economy seems to be less affected by supply and demand shocks mainly because the shocks themselves have decreased in strength. Consequently, the demand-price elasticity for petroleum and its derivatives in the United Kingdom tends to remain quite elastic (Fouquet, 2014).

Substitutes of petrol: London versus other regions in the UK

London has by far the most extensive and advanced public transport system of the whole of the UK, offering many substitutes for driving a vehicle through the city.

Transport for London (TFL) services cover a large area, with extensive city transit provision in the form of the Underground and Overground, regional trains, bikes and buses, with a universal payment/travelcard system in the form of an Oyster card which is easy and convenient to use. Public transport doesn’t suffer the delays of notoriously heavy London traffic.

Thus, there are many alternatives to driving to work, as well as disincentives, such as flat-rate premiums to pay for driving within the Congestion Charge zone which covers most of central London, as well as additional costs to pay on older/less energy efficient vehicles when travelling in the Ultra-Low Emission zone (which covers the same area as the Congestion Charge)

Prices of petrol are thus very inelastic in the capital, as those who rely on petrol for fuel in cars will have exhausted all the other available other options detailed above, however demand will be lower than in other comparative UK regions.

Other areas of the UK have fewer substitutes for public transport due to a less well-developed public transport network. Reliance on petrol will be higher in Manchester for example, with price elasticity of demand also being very small (i.e., inelastic) but overall demand will be greater in comparison to London.

Conclusion

The state of the price elasticity of demand of the prices of petroleum in the United Kingdom is, at present, relatively flexible, especially when compared between regions. The UK experiences a significant divide simply between London and other cities due to extensive, convenient and vastly superlative public transport offering and ‘sanctions’ on car drivers in the capital compared to Manchester, for example, never mind more suburban and rural regions that comparatively have little to no public transport offering. Additionally, London and other major cities serve more office workers that do not find it convenient to drive through city traffic, compared to suburban and rural areas where there is more diversity within the work sector and there are motorways and other such infrastructure for efficient, fast driving routes.

The pandemic in 2020 only served to highlight these differences- the emergence of the ‘work from home’ practice that most office-based workers had to employ meant that the only real demand left for petroleum depended on those who could not do their jobs from home, i.e key workers, tradesmen, etc. who used cars for equipment or where public transport is an inefficient commute option due to a lack of a continuous route or poor provision. However, an interesting perspective is that due to the nature of the crisis (highly infectious novel virus) demand for petroleum may have slightly increased due to the perception of public transport as unsafe in that climate- the effect is likely to have been negligible but it remains an interesting factor within this complex matter.

Looking to the future, it is likely that although short-term there will be little change in the price elasticity of demand for petroleum for the whole of the UK, London in particular will see an increase in the price elasticity of demand for petrol as both the disincentives for cars in the centre of the city and the incentives to use public transport rise (although it has been announced that TFL fares will increase next month, which will somewhat stagnate the effect but not massively, as public transport is already the alternative option for most people and there is little elasticity of demand here.)

Furthermore, it will be interesting to observe the UK’s transition into a country with de-carbonised cars and vans by 2035- first with the ban of the sale of new diesel and petrol cars and vans and only allowing hybrids to be sold, with all new cars and vans to be 0-emission-producing by 2035 (Government, 2020). This development promises to be huge for both the petroleum and car market, and while the ban on petrol/diesel cars only includes the sale of new cars for now, it will be a fascinating, seismic shift in the UK when it comes to deciding when and how the rest of the cars and vans in the UK will be decarbonised and thus (theoretically) hugely dropping the demand for petroleum.

References

Fouquet, D.-J. v. (2014). Historial Energy Price Shocks and their Changing Effects on the Economy. Centre for Climate Change Economics and Policy.

Glaister, D. J. (2002). The Demand for Automobile Fuel: A Survey of Elasticities. Journal of Transport Economics and Policy, LSE and University of Bath.

Goverment. (2016). UK: Key metrics about the Oil industry. 

Government. (2020). UK Department for Transport Report. 

Kim Suji, L. S. (2021). Changes in car and bus usage amid the COVID-19 pandemic. Elsevier.

Marshall, A., & Rotton, J. F. (1890). Principles of economics / Vol. 1. Macmillan and Co.

Pigou, A. C. (n.d.). The Economics of Welfare (2013 ed.)

PRA. (2020). UK Prices of Petrol per litre. 

Sheppard, D. (2021). Panic buying of fuel shows early signs of easing. Financial Times.

UK Goverment . (2020). Supply and demand of transport fuels during COVID-19.