The Power of a 1-to-1.5 Oil Ratio

Suppose that when the world reduces demand for oil by 1 percent, the world price of oil falls 1.5 percent. How much money does that save consumers?

There’s no trick to the problem; the total savings is 2.5 percent (or extremely close to that). For small changes, the two effects just add together.

This means that saving a barrel of oil saves consumers worldwide an additional 1.5 times as much money as the barrel cost, because the reduced demand lowers the world price.

That’s why a consumers’ cartel is so important. If I conserve 1 percent, I save 1 percent. But if all consumers conserve 1 percent, we all save 2.5 percent.