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Gasoline prices and car travel

Hydrocarbon Engineering,

The average retail price of gasoline /gal. has dropped 28% from a peak of US$3.70 /gal. on 23 June this year to US$2.68 /gal. on 8 December. The price however is not thought to have had much effect on automobile travel, and in turn, gasoline consumption. Gasoline is a relatively inelastic product, and price fluctuations tend to have very little influence on demand.

Price elasticity measures the responsiveness of demand to changes in price and almost all price elasticities are negative. An increase in price inevitably leads to lower demand and vice Versa. Air travel for holiday purposes tends to be highly elastic and a 10% increase in the price of air travel leads to an even greater decrease in the amount of air travel. Price changes have greater effects if the changes persist over time, as opposed to being temporary shocks.

Car travel in the US is much less elastic, and its price elasticity has in fact fallen in recent decades. The price elasticity of motor gasoline is currently estimated to be in the range of -0.02 - -0.04 in the short term, meaning it takes a 25 – 50% decrease in the price of gasoline to raise automobile travel by 1%. In the mid 1990s, the price elasticity for gasoline was higher at approximately -0.08, meaning it only too a 12% decrease in the price of gasoline to raise automobile travel by 1%.

The EIA’s Short Term Energy Outlook (STEO) uses a price elasticity of -0.02 to estimate and forecast consumption of motor gasoline, while also considering anticipated changes in travel demand and fuel economy. The December STEO expects that gasoline prices next year will be 23% lower than the average for this year, and consumption in December will be virtually unchanged from a year earlier, as increased fuel economy balances out increases in vehicle miles travelled in response to lower prices and other factors.

Price elasticities can however be difficult to interpret, as demand can change for reasons beyond changes in fuel price, including changes in other economic factors, demographics, driver behaviour, vehicle fuel efficiency, and other structural factors. Some possible explanations for the decline in gasoline price elasticity in recent decades includes:

  • The slowing of per capita vehicles miles travelled (VMT). After increasing for decades, VMT per capita slowed in the late 1990s and even declined in recent years.
  • The retirement of the baby boomer generation, because retirees tend to drive less than the working age population.
  • Population migrations to urban areas, as opposed to rural and suburban areas, because urban residents typically drive less.
  • Declines in licensing rates for teenagers, as young people delay or avoid getting their drivers’ permits and licenses.
  • The reduced share of household income devoted to motor gasoline expenses. As gasoline represents a smaller share of household expenditures, drivers may be less sensitive to fluctuations in price.

Edited from press release by Claira Lloyd

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