UNNATURALLY COOL81a/c system, higher utility bills might prompt you to upgrade to more effi-
cient technology. Given time, consumers and product developers find
ways to economize.
However, many economists remain skeptical that price increases in
the wealthy Gulf would be sufficient to reduce energy demand. They
expect that high personal incomes would enable consumers to pay more
without adjusting consumption. In the jargon of economists, the price
and income elasticity of energ y demand is assumed to be low.^27 A 100 per-
cent increase in price would have a smaller corresponding effect on
demand, which might only drop by, say, 30 percent.
Let’s assume this relatively low estimate of price elasticity, expressed
as a ratio of 1 to −0.3 (this is within the range of estimates deemed realis-
tic among energy scholars), is basically correct and calculate how demand
might then respond to price increases.^28 Abu Dhabi nationals were
paying about one- seventh the price paid by Arizonans. Using our price-
elasticity ratio of 1 to −0.3, this indicates that if prices were raised to
Arizona levels, demand will decrease from 71,000 kWh/year to 40,000
kWh/y. That’s a 44 percent decrease— a substantial drop, but it still leaves
Abu Dhabi nationals consuming almost triple the 14,000 kWh/y in Ari-
zona. For Abu Dhabi expatriates, who are only paying half as much
as Arizonans, demand would drop by about a quarter, from 26,500 to
20,000 kWh/y— still above but closer to Arizona’s energy use.
This suggests that, while price contributes considerably to demand,
at least three other factors are also important. First, while average tem-
peratures and incomes are similar between the two places, they are both
higher in Abu Dhabi. Second, homes and households are typically much
larger among Emirati nationals, since they often house domestic work-
ers and extended families. Arizonans’ homes and those of expatriates
are smaller on average. Both these would help explain higher demand
even in the face of equalized unit costs. Simply put, people in Abu Dhabi
can afford more electricity, and they need more both because it is hotter
and because their houses are bigger.
There is a third factor that would hinder Abu Dhabi’s demand from
fully adjusting downward: path dependence.^29 Over time, low prices have
locked in higher demand structurally. For instance, because of higher