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Gas Prices and Consumer Behavior

The discussion around the oil industry’s proposal for a linked carbon fee has raised some interesting questions about altering consumer behavior. Will a rise in the retail price of gasoline lead Americans to drive less or consume less fuel overall?

Empirical evidence from 1980 to 1990 found that a 1 percent increase in the price of gas is estimated to reduce gas demand by 0.3 to 0.35 percent in the short run and 0.6 to 0.8 percent in the long run. More recent research estimates the short run effect of gas prices on the demand for gasoline is much smaller: about -0.06 percent at the end of the 1990s and between -0.03 and -0.08 during 2001 and 2006.

Several critical points should be made. In terms of behavioral change, gasoline price changes have a larger impact on aggregate fuel consumption than on traffic levels. For example, a study by the Congressional Budget Office (CBO) estimates a traffic volume elasticity of -0.035 with respect to the price of gasoline. This result may point towards higher fuel efficiency of cars on the road and not towards reduction in driving, measured by vehicle miles traveled (VMT).

Also, these studies on the price elasticities of gas demand and VMT are based on data up to 2001 or the latest 2006. Therefore, they do not reflect the recent slump in VMT or the enormous spike in gasoline prices to over $4 a gallon or the rapid drop back to historically average prices. (A recent Harvard paper suggested that what are really needed are gas prices up to/above $8 per gallon to reduce emissions by 14 per cent from 2005 levels.).

The literature is also not broadly reflective of transportation alternatives within metropolitan areas. Intuitively, the elasticity for gasoline should be different in Manhattan than it is in Manhattan, Kansas, right? Examining driving trends in a dozen metropolitan highway locations in California, the CBO found gas prices do impact driving on metropolitan highways that are adjacent to rail systems (light rail and subways), with little impact in those places without. Further, they found that the increase in ridership on those transit systems is just about the same as the decline in the number of vehicles on the roadways.

This suggests that freeway traffic volume is responsive to changes in gasoline prices and commuters will switch to transit if service is available that is convenient to employment destinations.

Of course, transit alternatives will not be the only explanation. Rising unemployment, the development of more localized commercial centers, or housing relocation based on rising energy prices can all lead to decreased driving and less fuel consumption overall.