80UNNATURALLY COOLincomes (2016 GDP per capita of $98,000 in Abu Dhabi is still more than
double the $40,000 in Arizona). Comparing Abu Dhabi and Arizona
allows us to isolate the effects of price, since income and climate are simi-
lar. Any large differences in per capita electricity demand must be caused
by something else— probably different price levels. Indeed, electricity
prices in these two places are very different. Arizonans paid an average of
9.7 cents per kilowatt hour (kWh)— about seven times as much as Abu
Dhabi nationals, who paid just 1.4 cents, and a bit more than twice as
much as expatriate residents in Abu Dhabi, who paid 4.1 cents.
How important are prices to demand for electricity? Since my hypoth-
esis is that prices play a large role in consumption behavior, we should
see a large discrepancy among demand in Arizona when compared with
the two customer groups in Abu Dhabi.
Again, there are huge differences in consumption. Arizona house-
holds consume just a fifth as much electricity as households made up of
Abu Dhabi nationals and about half as much as expatriate homes in Abu
Dhabi. The demand differentials roughly correlate with the pricing dif-
ferentials. And, despite consuming so much less electricity, the average
Arizona household paid a higher annual bill than its typical counterpart
in Abu Dhabi.^26
These very simple results suggest that prices are a major influencing
factor on decisions to consume electricity.
What if we wanted to quantify the effect of price? We could try an
experiment: what would happen to electricity demand in Abu Dhabi if
prices were increased to Arizona levels? To answer this question, we first
need to determine how sensitive Abu Dhabi’s electricity use is to prices.
In other words, will Abu Dhabi households use less energy if prices go
up, or will they simply pay more money and maintain the same usage?
Economists believe that energ y demand is resistant to price increases
in the short run, since energy products like electricity have few substi-
tutes. Rates of consumption are linked to existing infrastructure, which
itself is based on past energy prices. If your house has an inefficient
air- conditioning system, it isn’t easy to reduce your exposure to a rate
increase without feeling uncomfortably warm. Over time, however,
energy demand is more elastic. When the time comes to replace your