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American Behavioral Adjustments to Higher Gasoline Prices
Posted: 22-Jun-2008
Posted: 22-Jun-2008
The consumer
behavior adjustment to higher gasoline prices has been slow in the United States
MPG has increased by one mile for cars and light trucks since the gasoline price increased in 2005. GM has discontinued the production of Hummers, which drives 8 mpg as showing-off can no longer pay the gas price. Consumption of gasoline dropped from about $400 billion in 2005 to $380 billion in 2008. American motorist drove 11 billion miles less in March 2008 than they did a year earlier, suggesting 4.3% drop in vehicle miles.[2] The cumulative traffic volume has fallen by 17.3 billion miles since November 2006. Gasoline demand over the March 2007-March 2008 period fell by more than 1%, indicating destruction in demand which is needed for prices to stabilize. American motorists are also driving more slowly to increase MPG efficiency.[3] There are also indications that American commuters are switching to public transportation, particularly rail because it is less affected by traffic congestion. In addition, it has been estimated that a 20 percent increase in gasoline prices would affect freeway traffic volume and lead to a 2 percent increase in the average rail system ridership. Research has also shown that the most important factor motorists consider when deciding whether to continue to drive their vehicles or to switch to another mode of transportation is a change in the cost of driving. However, much of these gains can be undone if gasoline prices fall.
Another factor may be location decisions. For example, Americans living in metropolitan areas are contemplating selling their spacious, suburban homes and moving closer to downtown areas. Many of those workers drive 50 minutes to reach work. Some consider the cost of this drive as a second or third mortgage.
Why has the American consumers shrugged off gasoline until the last few months? Contrary to the higher prices of the 1974-75, 1979-80 and 1990/1991 supply shocks, the current shock is in demand which originated gradually and is a result of higher economic growth. The energy intensity in real GDP is one third of what it was in the 1970s. Another reason is that consumers can afford the price increases and gasoline was cheap. This is no longer the case as the price of oil for April 1981 in today’s (2008) dollars is $103 compared to $139 now. The dollar value ofU.S.
Higher gasoline prices are also creating policy challenges at the national level. The climate change bill known as the cap-and-take bill sponsored by senators Joe Lieberman and John Warner failed to pass the Senate after gasoline prices climbed above $4 a gallon. If this bill passes, the price of a gallon of gasoline may exceed $6.
There is also a national debate on whether the government should allow drilling in coastal and wilderness areas. Regulations are pending that may protect oil companies from prosecution if polar bears are harmed while drilling in the Chukchi Sea off northwestern Alaska. TheUS government estimates crude oil reserves under
the Chukchi Sea Chukchi
Sea Chukchi Sea
On the macroeconomic front, higher oil prices are also creating a policy conflict at the Federal Reserve as fears of inflation continue to mount. Many analysts are fearful that the Fed may cut the economic recovery short if it reverses gear and start increasing interest rates to fight inflation (and to stabilize the dollar).
Regardless of the all the policy conflicts, oil and gasoline prices have reached levels American consumers cannot ignore. The adjustment is happening and it should accelerate if oil prices stay at the current levels!
MPG has increased by one mile for cars and light trucks since the gasoline price increased in 2005. GM has discontinued the production of Hummers, which drives 8 mpg as showing-off can no longer pay the gas price. Consumption of gasoline dropped from about $400 billion in 2005 to $380 billion in 2008. American motorist drove 11 billion miles less in March 2008 than they did a year earlier, suggesting 4.3% drop in vehicle miles.[2] The cumulative traffic volume has fallen by 17.3 billion miles since November 2006. Gasoline demand over the March 2007-March 2008 period fell by more than 1%, indicating destruction in demand which is needed for prices to stabilize. American motorists are also driving more slowly to increase MPG efficiency.[3] There are also indications that American commuters are switching to public transportation, particularly rail because it is less affected by traffic congestion. In addition, it has been estimated that a 20 percent increase in gasoline prices would affect freeway traffic volume and lead to a 2 percent increase in the average rail system ridership. Research has also shown that the most important factor motorists consider when deciding whether to continue to drive their vehicles or to switch to another mode of transportation is a change in the cost of driving. However, much of these gains can be undone if gasoline prices fall.
Another factor may be location decisions. For example, Americans living in metropolitan areas are contemplating selling their spacious, suburban homes and moving closer to downtown areas. Many of those workers drive 50 minutes to reach work. Some consider the cost of this drive as a second or third mortgage.
Why has the American consumers shrugged off gasoline until the last few months? Contrary to the higher prices of the 1974-75, 1979-80 and 1990/1991 supply shocks, the current shock is in demand which originated gradually and is a result of higher economic growth. The energy intensity in real GDP is one third of what it was in the 1970s. Another reason is that consumers can afford the price increases and gasoline was cheap. This is no longer the case as the price of oil for April 1981 in today’s (2008) dollars is $103 compared to $139 now. The dollar value of
Higher gasoline prices are also creating policy challenges at the national level. The climate change bill known as the cap-and-take bill sponsored by senators Joe Lieberman and John Warner failed to pass the Senate after gasoline prices climbed above $4 a gallon. If this bill passes, the price of a gallon of gasoline may exceed $6.
There is also a national debate on whether the government should allow drilling in coastal and wilderness areas. Regulations are pending that may protect oil companies from prosecution if polar bears are harmed while drilling in the Chukchi Sea off northwestern Alaska. The
On the macroeconomic front, higher oil prices are also creating a policy conflict at the Federal Reserve as fears of inflation continue to mount. Many analysts are fearful that the Fed may cut the economic recovery short if it reverses gear and start increasing interest rates to fight inflation (and to stabilize the dollar).
Regardless of the all the policy conflicts, oil and gasoline prices have reached levels American consumers cannot ignore. The adjustment is happening and it should accelerate if oil prices stay at the current levels!
[1] https://www.cbo.gov/ftpdocs/88xx/doc8893/Chapter2.6.1.shtml#1073291
[2]
[3] For more
information see D.
By Shawkat Hammoudeh,
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