|The two periods of the study experienced comparable changes in the price of gasoline. Click to enlarge.|
A study by researchers from the University of California Energy Institute completed last year concludes that there has been a structural change in consumer demand for gasoline, with consumers appearing significantly less responsive to gasoline price increases now than 25 years ago.
Because of that change, they suggest, technologies and policies—such as CAFE—for improving vehicle fuel economy may be increasingly important in reducing US gasoline consumption, rather than reliance on market-driven price increases or the application of a fuel tax.
The study, by Jonathan Hughes, Christopher Knittel and Dan Sperling, estimated and compared the short-run price elasticities of gasoline demand in two periods of comparable price volatility: November 1975 through November 1980 and March 2001 through March 2006.
The results presented here strongly support the existence of a structural change in the demand for gasoline. Estimates of the short-run price elasticity of gasoline demand for the period from 1975 to 1980 range from -0.21 and -0.34 and are consistent with estimates from the literature that use comparable data. However, estimates of the price elasticity for the more recent period are significantly more inelastic ranging from -0.034 to -0.077. This result has important policy implications.
The short-run price elasticity is a measure of the change in demand—either through a reduction in vehicle miles travelled, an increase in the fuel efficiency of driving (e.g., through better maintenance, more efficiency-oriented driving behavior) or both. Although short-run elasticity may also include responses such as the purchase of more fuel-efficient vehicles, the researchers note, vehicle purchase decisions are typically more long-run in nature.
There could be multiple explanations for the change, they suggest, which may reflect shifts in land-use, social or vehicle characteristics during the past several decades.
Whatever the cause, the results presented here suggest that today’s consumers have not significantly altered their driving behavior in response to higher gasoline prices. It is important to note that these results measure consumers’ reactions to short run changes in gasoline prices. However, it is the long-run response that is the most important in determining which polices are most appropriate for reducing gasoline consumption.
They conclude that reduced responsiveness in adjusting miles driven to increases in gasoline price is unlikely to change significantly for long-run behavior because the factors that may contribute to inelastic short-run price elasticities such as land use, employment patterns and transit infrastructure typically evolve on timescales greater than those considered in long-run decisions.
In terms of vehicle fuel economy, consumers may respond to higher gasoline prices in the long-run by purchasing more fuel efficient vehicles. However, if consumers in the period from 2001 to 2006 were purchasing more fuel efficient vehicles in response to higher gasoline prices, one would expect to see at least a portion of this effect in the short-run elasticity.
While our results do not preclude a significant shift to more fuel efficient vehicles in the long-run response, the highly inelastic values that we observe suggest that the vehicle fuel economy component is small. If the long-run price elasticity is in fact more inelastic than in previous decades, smaller reductions in gasoline consumption will occur for any given gasoline tax level.
As a result, a tax would need to be significantly larger today in order to achieve an equivalent reduction in gasoline consumption. In the U.S., gasoline taxes have been politically difficult to implement. Higher required tax levels pose an addition hurdle. This may make tax policies impossible to implement in practice. In this case, alternate measures such as increases in the CAFE standard may be required to achieve desired reductions in gasoline consumption.
(A hat-tip to Bob!)