The relationship between the price and demand for natural gas: A partially controlled study

Abstract

Since the onset of the energy crisis, indicated by the start of the Arab oil embargo, the price of natural gas increased for most residential consumers. the relationship between price and monthly demand over five years is examined for a sample of almost identical owner-occupied town houses in a planned community in central New Jersey, USA. It is shown that, since the onset of the energy crisis, the average price, in current dollars, of gas has increased in the USA, and the average demand has decreased, leading to a significant negative estimate of elasticity. However, this disappears if the effects of overall inflation on demand are removed. Closer examination reveals that the relationship between current price and demand is not linear, since the major decrease in demand occurred during the winter immediately following the embargo, but the major increases in current price occurred during subsequent winters. Whether the large reduction in demand is due to price increases, overall inflation, or is a response to conservation appeals by US public officials is an open question. No short-term effects of price on demand are found.