More on gas prices: why will Americans pay any amount for gas?

gasoline-elasticity.gifIt has long been noted that consumers are curiously indifferent to gasoline prices. When gas is cheap, people buy fuel-guzzling cars and drive them a lot. When gas is dear, people…continue to buy fuel-guzzling cars and drive them a lot.

A recent study suggests that this price indifference has gone up in recent years. Using various statistical methods to compare consumer behavior in the late ’70s to behavior in the early ’00s, the authors suggest that Americans seem less affected by gas prices than ever.

Although the data doesn’t tell us why this might be the case, the authors offer a few possible explanations. The first is related to land use. Suburbanization, lengthy work commutes, the rise of big-box retailing, etc., might restrict our ability to reduce our road miles. Put simply, driving isn’t discretionary for many.

A second possible explanation is technological. Drivers today face a more limited set of vehicle choices than drivers in the ’70s. When the CAFE standards were first implemented, each successive generation of cars was more fuel-efficient than the last. But CAFE standards have been stagnant for about 20 years. Now if you want a more fuel-efficient car, you either have to downgrade to a smaller vehicle class or buy a more expensive hybrid.

Both explanations center on the dwindling of alternatives. People fail to respond to gas prices because it’s harder to do so these days, not (necessarily) because they are truly indifferent.

In support of this view, the study revealed one intriguingly counterintuitive finding: drivers with higher income tend to be more sensitive to fluctuations in gas prices than those with lower income. Although the effect isn’t strong, it does bolster the notion that price insensitivity is the result of a lack of alternatives. People with lower incomes have probably already eliminated much of their discretionary driving, so they have limited flexibility in responding to gas price spikes. Likewise, high-income households often own multiple cars, so they can shift their fuel consumption quickly by favoring the car with better mileage.

The study suggests that better mileage standards may be a useful counterpart to gasoline taxes. Policy types are generally critical of CAFE standards, with good reason — forcing auto makers to build efficient cars is a fairly backwards way to address the problem of fuel consumption. But whatever its theoretical flaws, CAFE did basically do its job. Pushing on supply and demand simultaneously is likely the fastest way to achieve emissions reductions. Drivers need an incentive, but they also a choice.

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adam

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  1. Steve W - June 20, 2007

    Not only doesn’t $3+ a gallon of gas discourage
    drivers from buying large vehicles, they push the limit
    on the highways around Denver. They zoom by me at
    70mph and higher. . . but complain about the price of
    gas. . . hmmmmm. Where’s the disconnect here?

  2. James Moses - June 20, 2007

    Gas is still very cheap for us here in the U.S. At $2.89 a gallon I use about two gallons a day or right around $6.00. I make $136.00 a day working. This is only 3.6% of my paycheck. Now look towards central american, for example, where gas is also $2.89 a gallon and the average wage is around $8 per day. The relative cost of gasoline is much higher. And at $4.50 for a starbuck’s latte without batting an eye we are used to such costs. As was mentioned in last week’s “Praise high fuel costs” gas will need to hit $15+ a gallon before any real change hits. But do you think the oil industry is going to let gas become priced out of the market? No way. So…here we are. This all reminds me of my smoker friends who swore to me that they would stop smoking when a pack of cigarettes hit $5.00. Now they pay over $6.00 and are smoking as much as ever. Funny little primates we are…

  3. James - June 20, 2007

    We all just love to complain about the price of gas. It has almost become the new Great American Pastime. In a weird way bitching about the price of gas makes us feel united (“One Nation, under the High Price of Gas”). But, has this stopped us from buying huge cars? Has this translated into pressure on our law makers to initiate any real fuel efficiency standards? Not really. As human nature dictates, most of us will never stop complaining long enough to make any real effort towards changing our situation. If we all carpooled just twice a week and stopped buying vehicles that get less than 35 mpg we would cut fuel consumption in this country drastically. But, we don’t do this as gas is still considered cheap for most of us. That’s why we need state and federal regulations that mandate higher fuel effeciency, for example. I just hope we have the political will to say no to big oil and move in the right direction. Thank you for allowing me my $0.02. Now, off I go to work in my little fossil fuel-burning automobile.

  4. Edward Mangold - June 20, 2007

    A reason for the lack of response to high gasoline prices may be that not all auto owners replace their vehicles every 3 years or so. A well-maintained car can easily give satisfactory service for 10 years or more, before being replaced. During that time gas price increases and declines will go through several cycles.
    When the replacement decision is made, the purchaser may well have to contemplate what future predicted gas prices will be in choosing the fuel economy of the vehicle which she/he will purchase.

  5. Edward Mangold - June 20, 2007

    A reason for the lack of response to high gasoline prices may be that not all auto owners replace their vehicles every 3 years or so. A well-maintained car can easily give satisfactory service for 10 years or more, before being replaced. During that time gas price increases and declines will go through several cycles.
    When the replacement decision is made, the purchaser may well have to contemplate what future predicted gas prices will be in choosing the fuel economy of the vehicle which she/he will purchase.

  6. Mani - June 20, 2007

    The problem is our disposible income. For majority of people, price of gas compare to their disposible income is insignificant. The disposible income drives carbon usage, either in the form purchasing large cars or purchase of “things” that we really do not need. We are too rich for our own good!

  7. Brad - June 20, 2007

    I agree with the points about ones limited ability to reduce their fuel consumption given their living situation and the choices available to them. This is particularly problematic in Canada where I live, because everything is far more spread out in a country that’s the second largest in the world geographically but only has 30 million people; not to mention the fact that most live in suburbs and commute significant distances to work.
    Having said that, I believe we need more than simply some ‘incentives’ to purchase more fuel efficient cars, because we have to consider who those incentives will typically reach. If you can afford a hybrid car, it is unlikely that a small tax incentive will be of any persuasion. At the end of the day we don’t respond well to delayed gratification, especially in small doses; i.e., “if you buy this product you’ll receive an additional $125 on your tax refund 10 months from now.” In the end, I think the ones receiving this tax incentive are people who would have likely purchased the hybrid anyway – if someone has their eye on that Mazda Tribute, a miniscule tax incentive will not likely persuade them to buy a hybrid sedan or compact.
    So if the old adage that driving the price of a commodity up will drive down its consumption is failing with gas prices, and the only ones benefiting are ‘big oil’, then perhaps the price of the gas guzzlers themselves should go up through additional taxes to manufacturers, who will then pass on those inflated costs to consumers – who, in turn will be faced with a choice to buy an “expensive gas guzzler” in favour of a “cheaper hybrid or compact.” In other words, paying an extra $2000 – $5000 paid up-front is a lot more likely to persuade someone than immeasurable tax incentives or poorer gas mileage.

  8. FD - June 20, 2007

    I agree with the points on mandatory driving due to suburbanization and car replacement. I live 24 miles from work, car pool 3-4 days a week, and walk/bike as much as I can for errands, but I still have to drive to work the other 2-3 days a week no matter what gas costs. I think many people are in the same situation.
    Additionally, as someone pointed out, when I purchase my next vehicle it will be more efficient than my current one, but the one I have is reliable, looks OK, gets 32 mpg combined (EPA says 27), and is paid off. I may want a shiney new prius, but it’s not an option for me to run out to buy and new car everytime they come out with a better one. My pessamistic theory is that people are frustrated by $3 a gallon gas, but if it stays there for a year of two, they’ll all get used to it and their next car will get similar mpg because they’ll be used to the expense.
    I’m looking forward to my xtracycle for those errands that require me to carry more stuff.

  9. Ernest - June 20, 2007

    Who are these “theorists” who dislike better CAFE standards? When confronting a backward industry, sometimes government goosing is the only way to get better performance. Or do we want to wait until Toyota buys General Motors and shapes it up?
    Also, it has been reported somewhere that sales of large gas-guzzlers, SUVs and otherwise, are in fact dropping. If this is true, total gas consumption and pollution may be falling, even if people’s mileage remains the same.

  10. Adam Stein - June 20, 2007

    It’s not really a renegade band of theorists who don’t like CAFE. Standard economics suggests that mandating mileage standards is going to be a highly inefficient way to achieve reductions in fuel use. Inefficient in the technical sense of costing a lot more money than necessary to both drivers and auto manufacturers.
    In theory, it’s better just to tax gasoline and let the market work its magic. GM will build better cars when people want to buy them, which they will when gas costs $5/gallon.
    But, yeah, in the real world, gas taxes are a dead letter and CAFE has been useful.

  11. Anonymous - June 20, 2007

    Now someone said we need to use cars that get 35mpg and if we all carpooled…most people don’t live next to the people they work with, nor hold virtually the same schedule. The kicker is if you want that car pool to be comfortable a car that holds 4+ grown adults don’t get 35mpg…and then you have everyone driving SUVs and minivans that get 18-20mpg just to carpool. This is something that should have been prepared for a long time ago, it’s no longer a shortage of oil as if was a couple years ago…it’s a shortage of refineries build another and prices go down. As we should forget the impact on the planet and do whats best for people it’s not good to be running all our refineries at 99% capacity…if one fails we will hit $5+ per gallon which is ridiculous. Anyone else that complains about prices in thier countries, too bad your government probably doesn’t contirbute nearly the amount of money ours does to keep fuel cost effective for us. Close to the trillions of dollars just for our energy and we still get jacked at the pump, if we had another refinery we would be back to the $1.50 it should be.

  12. Al - June 21, 2007

    We have an ’05 Odyssey minivan, and an ’01 Highlander “SUV”. Last week we took a 1000 mile vacation trip in our Odyssey with five people on board and all their baggage. We cruised at 80 MPH on Montana and Idaho interstates, and got 25-27 MPG, or 125-135 seat miles per gallon IN COMFORT. We also have a sailboat to tow, which weighs 2500 lbs. Our cars meet our requirements, and an increase to 35 MPG would save us little money with a radical decrease in usability. However, when we replace the Highlander we will get a hybrid, even though hybrids are not any more efficient at high cruising speeds than conventional cars. We would use it enough in town to justify the cost, since I expect gas prices to rise dramatically in the next few years.
    It takes years to modify lifestyle to react to increased costs, but the best way to reduce the use of fuel is to have it cost more. CAFE is a bunch of bologna and always has been.

  13. Chad - June 21, 2007

    Adam: I agree 100% with your argument that gasoline (or more broadly, carbon) taxes are the most effectively policy for improving fuel efficiency. CAFE standards are and always have been a cowardly “back-door” attempt for politicians to push the problem onto someone else’s doorstep – in this case, the auto manufacturers.
    Ford builds what Bubba Joe wants. As long as gas is reasonably cheap, Bubba is still going to want his F350, just like the soccer mom in the nearby town thinks she needs a ten-ton SUV to haul her two kids to practice. The problem is not GM or Ford – it is WE who are the problem. Until OUR preferences or incentives change, WE will demand mega-cars, and that is precisely what manufacturers will provide.
    CAFE standards are essentially politicians demanding that auto manufacturers sell what their customers don’t want, rather than the politicians themselves having the guts to confront the consumers directly.
    As another point, I have found it fairly easy to convince my educated, rightward-leaning friends that a carbon tax is preferable to the income tax. It is a pretty easy economic argument (taxing “bad” things is better than taxing “good” things). I actually find more resistance to the idea from more from people who lean left but are not particularly environmentalists.

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