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First signs of falling demand for oil

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J Pat Carter / AP

(Read caption) In this May 5, 2011 photo, a motorist fills her car at a Mobil gas station in Pembroke Pines, Fla., where the price of regular gas was near $4 a gallon. Americans are switching to more fuel efficient cars and driving fewer miles, but purchases of gasoline are still gobbling up an increasing chunk of the nation’s pocketbook.

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As I've written repeatedly in the past, the price elasticity of demand (and supply) increases as time passes. In the short run, people may not have a choice in changing driving patterns or changing from SUV:s to hybrids, but after a while that happens. And furthermore, the higher oil prices will generally with a few months time lag weaken most economies, reducing demand.

Also, physical constraints may prevent oil producers from immediately increasing production, but in the medium term some new oil may be released where spare capacity exists. And in the longer term, higher prices will increase total capacity and thus total supply.

We see now the first signs that the great oil price shock earlier this year caused by the war in Libya in combination with QE2, has started to reduce demand, something that in turn is helping to reduce the increase in oil prices.

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