Hi Amrit,

Great question.  The answer is not so straight forward.  Owen is right on the economic equation that typically efficiency = lower prices = increased demand.   I guess hand in hand with that countries with artificially low prices (like Iran until recently) were very inefficient in oil utilization, because per dollar of GDP, oil consumption is one of the highest in the world there.

I like the fact that we have all these different ways to consume/produce energy.  Competition means diverse supplies, fewer interruptions and lower prices.  I think it is up to the people to decide if they want to lower consumption or increase consumption based on price.  Drivers buy hybrids not so much for economic efficiency (because the higher capital cost hardly covers the savings in operating costs) but for personal reasons.  For instance, they would rather pay Toyota more for the car than buy more gas from oil companies (and possibly from regimes they don’t like).  Maybe they have a personal goal about reducing their carbon footprint.  Maybe they like the fact that hybrids are less stinky when they back out of the garagge.  Also, hybrid owners spend less time at the gas station, so there is an opportunity cost savings there.

I think when looking at a decision, or making a proclamation, people need to look at what THEY do first.  For me, I am almost certain my driving habits have not changed at all since I bought a 45mpg Prius.  We have a van that gets 18mpg, and it gets barely used, because given a choice we always take the cleaner, more efficient, less costly vehicle.  It just feels better to me when driving, and economists will have a tough time quantifying that effect.