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The Progressive Economics Forum

Responses to high gas prices

Gas prices are way up and look to continue that way looking forward. So what does this mean in terms of behavioural change? Todd Litman does a major review of all kinds of transportation elasticities. An excerpt:

As it is usually measured, automobile travel is inelastic, meaning that a percentage price change
causes a proportionally smaller change in vehicle mileage. For example, a 10% fuel price increase only reduces automobile use by about 1% in the short run and 3% over the medium run. Even a 50% fuel price increase, which seems huge to consumers, will generally only reduce vehicle mileage by about 5% in the short run, a change too small for most people to notice, although this will increase over time as consumers take the higher price into account in longer-term decisions, such as where to live or work.

But fuel prices are a poor indicator of the elasticity of driving, because over the long term
consumers will purchase more fuel-efficient vehicles. Over the last few decades the real (inflation adjusted) price of vehicle fuel has declined significantly, and vehicle-operating efficiency has increased. Real fuel costs are now a third lower, and an average car is nearly twice as efficient. For example, the $0.35 paid for a gallon of gasoline in 1955 dollars is worth $2.35 in current dollars, and an average car of that time could only drive 12 miles on a gallon. Not surprisingly, consumers have responded to these trends by purchasing larger and more power vehicles, and driving more miles per year. Had fuel prices increased with inflation, fewer SUVs would be sold and motorists would drive fewer annual miles.

Residents of countries with high fuel taxes tend to purchase more fuel-efficient vehicles and drive fewer annual miles per capita. For example, fuel taxes are about 8 times higher in the U.K. than in the U.S., resulting in fuel prices that are about three times higher. U.K. vehicles are about twice as fuel efficient, on average, so per-mile fuel costs are only about 1.5 times higher, and automobiles are driven about 20% less per year, so annual fuel costs are only 1.25 higher than in the U.S. Since per capita vehicle ownership is lower, average per capita fuel expenditures are similar in both countries. Similar patterns can be found when comparing other countries with different fuel prices. This indicates that automobile use is sensitive to price.

The relatively low elasticity of driving with respect to fuel prices hides a much higher overall
elasticity of driving. Fuel is only about a quarter of the total cost of driving (Litman, 2005). An
elasticity of –0.3 for vehicle travel with respect to fuel price indicates that the overall price
elasticity of driving is about –1.2, making driving an elastic good with respect to total vehicle
costs. Various types of pricing reforms result in motorists paying more directly the costs of roads, parking.

Another from Lee Schipper, “Automobile Fuel; Economy and CO2 Emissions in
Industrialized Countries: Troubling Trends through 2005/6″
reflects on some recent trends in the US vs Europe and Japan:

Fuel economy technology, while important, isn’t the only factor that explains differences in tested or on-road fuel economy when comparing vehicle efficiency and transport emissions in different countries. Fuels, technology, and driver behavior also play significant roles in how much fuel is used. As long as the upward spiral of car weight and power offsets much of the impact of more efficient technology on fuel efficiency, fuel economy will not improve much in the future. And as long as the numbers of cars and the distances cars are driven keep creeping up, technology alone will have a difficult time offsetting all of these trends to lower fuel use and CO2 emissions from this important sector.

UPDATE (May 28): Schipper is quoted in this good NY Times article on how households are adapting:

Gasoline demand has fallen sharply since the beginning of the year and is headed for the first annual drop in 17 years, according to government estimates.

The Transportation Department reported Friday that in March, Americans drove 11 billion fewer miles than in March 2007, a decline of 4.3 percent. It is the first time since 1979 that traffic has dropped from one March to the next, and the month-on-month percentage decline is the largest since record keeping began in 1942.

… Whether today’s high costs will translate into a permanent change in behavior remains to be seen, of course. The Energy Department expects gasoline sales to fall by 0.6 percent this year, the first drop since 1991, but it expects consumption to rebound in 2009 as the economy strengthens.

Still, analysts said that the hardship induced by today’s prices is getting close to the level reached during the oil shock of the early 1980s. Americans spend 3.7 percent of their disposable income on transportation fuels. At its lowest point, that share was 1.9 percent in 1998, and at its highest, it reached 4.5 percent in 1981, said Ms. Johnson of Global Insight.

Still, despite the rise in energy prices, gasoline remains cheaper in the United States than in most industrialized countries. In France, for example, a gallon of gasoline costs about $7.70 at today’s exchange rates. Also, Americans pay less to drive a mile today than they did in 1980, once the impact of inflation and gains in fuel efficiency are taken into account, said Lee Schipper, a visiting scholar at the transportation center of the University of California, Berkeley.

Mr. Schipper estimates that the cost of gasoline for each mile traveled will be about 15 cents this year. That is nearly three times the low of 5.6 cents a mile reached in 1998, when fuel efficiency peaked and prices were at their lowest. But it is still cheaper than the record paid in 1980 of 17.1 cents a mile, adjusted for inflation.

Enjoy and share:

Comments

Comment from gas additives
Time: May 27, 2008, 12:51 pm

Very interesting excerpts. I agree that gas is only a part of the cost of running a vehicle, but I don’t know that I would agree that it’s that low of a part. I guess it depends on how often you have to take your car the mechanic 😉

Comment from Stuart Murray
Time: May 27, 2008, 1:21 pm

We are also cursed by continuously improving vehicle longevity, so that new cars are often on the road for 15-20 years before they are replaced. I can’t recall who said it but it was something along the lines of “We go into an energy shortage with the cars that are currently on the road, not the cars we wish we had on the road.” Consumer reports has a very cutting article on the topic of converting to more fuel-efficient vehicles. Their take is that you should only replace older gas-guzzlers and not rush to replace new gas-guzzlers, as vehicle depreciation is 50% of car ownership costs. So it will take a decade or two before we have a car stock like that of the UK, even if we match their gas taxes.

I’m waiting for an excuse to replace my 1990 chevy lumina with a hybrid or a subcompact, but it only has 115,000km on it, and I can’t justify spending $20,000+ on a new vehicle just so I can save $1,000 a year on gas. As the “Ashes to Ashes” report makes clear, a large fraction of a vehicle’s footprint is the resources consumed in its manufacture. So if I bought a new car, I would be causing a sudden massive footprint.

I just participated in a focus group regarding the new Canada Line in Vancouver. It turns out my transit commute will be 4 minutes longer, not shorter, after the line is brought in. I already save an hour a day by driving, all of which I spend with my young kids. And the time savings is increasing, so once again there’s no incentive to change to transit.

My feeling is, when the economics, emotions and ethics are all pointing in the same direction, there’s no dilemma.

Comment from D k Harley
Time: May 27, 2008, 4:51 pm

The ever increasing price of fuel will impact the entire eco/social way of life in this country. Our economy is in part, designed on a model of mobility. This involves the mobility of commerce (goods and services) including personal vehicle, rail , truck, shipping,Business travel,(personal vehicle ,air, public transportation ), and recreational travel,(personal vehicle, air, rail, bus etc. ). The effect of the consumers ability to choose the frequency of this mobility, based on needs and expenses, will greatly impact this model of mobility and force our economic machine to either stall completly or under go a paradime shift unlike we have ever witnessed.

Comment from Michael Dougherty
Time: June 8, 2008, 3:20 pm

Looking at gas prices narrowly and extrapolating from the past is useful, but it is incomplete at best. Current over-the-top consumer debt, and the crash of the housing bubble, is a remarkably different context than in past decades that are held up as reference points for analysis. There is no comparison really, because the overall context is so different.

The slack in gas prices up until the current surge has been taken up with debt service. Increases in fuel costs in this new context cannot be absorbed, nor can the corresponding increases in food, goods and services due to higher energy prices. Not only will there be considerable demand decay, there are emerging job losses, and perhaps collapse into a deep recession if not depression due to deep demand decay on all fronts.

It is a bit preposterous to examine gasoline prices and then project current behavior based on past behavior. Food prices are going berserk, fewer people have health insurance, more are unemployed, more are in deep debt, still more are defaulting on home loans, and more still have experienced lower wages. This is a new context, not remotely comparable to the past. In this context, gas prices are the straw that is breaking everyone’s back. Wait until the spot shortages arise.

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