As SUV sales plummet and gasoline use finally drops, one meme spreading around is, "Looks like people respond to price after all." The implication seems to be that any demand response other than zero proves that prices are wonderfully effective.
The problem, however, is not response is or might be zero. (I can think of few who ever claimed that.) The problem is that it takes a big price increase to produce a small response.
The current data support the conventional wisdom: 40 to 50 percent long-term elasticity, low enough to discourage us from relying on price as the main means of reducing emissions, high enough encourage us to use price as one among many means. At first glance, the raw data are even more discouraging than the conventional wisdom: Inflation adjusted gasoline prices have risen almost two-and-a-half times since 2000. Gasoline demand has dropped by slightly over 20 percent. But long-term elasticity is, by definition, a delayed response -- at least three years.
Also, if we are interested in price response as opposed to income response, we have to adjust for growth in GDP. So a rough calculation yields 45 percent long-term elasticity (with some biases that probably overstate the result). Here are two graphs, the first of raw data, the second after adjustment (click for larger versions):
You find raw data on which these graphs are based here:
Gas prices from the EIA [Excel worksheet]
Consumption from the EIA [Excel worksheet]
Real GDP from the BEA [Excel worksheet]
My quick and dirty analysis to derive the graphs [Excel worksheet]
Oil: enough energy to melt glaciers!
Comments
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wiscidea Posted 9:00 am
10 Jun 2008
I've said it before and I'll say it again. I have to assume there are a lot of people in a similar situation. I commute 23.7 miles to work. I plan errands accordingly, stopping at the post office, grocery store, et cetera on the way to or from work. I drive the more fuel-efficient vehicle most of the time. Yes, I have an SUV, but it spends a lot of time in the garage. I tend not to drive anywhere on the weekend. I don't go home after work and then turn around and drive off somewhere else. We drove to South Dakota a couple years ago, but do not otherwise drive long distances.
There is no driving I can cut to reduce my consumption of gasoline.
One might suggest I trade in the SUV for a hybrid or some other fuel efficient vehicle. But it is barely paid off. There is no way to trade it in without committing myself to another four or five years of car payments, which I've finally escaped and cannot afford to return to. And who the heck would buy it?!
One might suggest I sell the house and move closer to my job. But we bought the house when interest rates were at a record low and houses were relatively affordable. Assuming I could unload it on someone else who wants to commute, there is no way I could exchange it for a comparable 1200 or even 900 square foot house in an urban area.
Gar wrote...
"But long-term elasticity is, by definition, a delayed response -- at least three years."
How about five or ten years?
I'm not posting this to complain about the cost of gasoline. I've actually managed to adjust to the $4.00 per gallon price tag. It is still a bargain. I'm just saying that no one should be shocked that consumers are not responding very quickly. And, of course, I frown on people getting a over enthusiastic about the rising cost of gasoline.
I think people need a bit of financial flexibility to adjust to the reality of expensive petroleum. And there are very few people who have such flexibility. If I had the cash or could afford to take on a new loan, I'd probably buy the safest most fuel efficient car out there. But how many people can do this? If I didn't like my house so much and could afford to lose money, I would consider moving to the heart of the nearest urban area. But how many people can do this?
How to get people to respond more quickly?
(1) Good and stable jobs the pay enough so folks can afford to upgrade to a better vehicle or consider moving closer to where they work... and not have to move again because the job disappears!
(2) Zero-down low-interest loans for fuel efficient vehicles. Include the option of saving money if the loan is paid off early.
(3) Zero-down low-interest loans for urban dwellings. Include the option of saving money if the loan is paid off early.
(4) Design a comfortable safe urban dwelling of about 1200 square feet that someone can buy, including a small plot of land for a garden, for $150,000.
(5) Give everyone flying magic ponies... the most realistic of my five suggestion.
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hapa Posted 11:22 am
10 Jun 2008
how much do you think you could swing for a commuter car, something yaris-size or smaller, maybe electric? don't think of a particular vehicle; just the price.
would you ride a scooter, maybe electric? not every day.
if yours is a two-income household, how much of a tax reduction, a medical cost reduction, or a combination would get you within reach of the high-efficiency vehicle of your choice?
can you change your schedule, work one less day a week, for a couple more hours a day? you know, all those kinds of options.
(gotta say, about 3 years ago, i had the feeling bubble-sprawl combined with average-to-low fuel efficiency would lead to inelasticity in gas demand.)
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Gar Lipow Posted 11:42 am
10 Jun 2008
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Tasermons Partner Posted 1:03 pm
10 Jun 2008
One might've suggested that ya not have bought the SUV to begin with.
Then you wouldn't haveta worry 'bout it's decrease in value.
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hapa Posted 3:49 pm
10 Jun 2008
Meantime large scale public investment to make switching possible.
with high energy prices, no savings, and dominos continuing to topple in the credit ugliness, it could be only the top quintile will be able to pay for switching?
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wiscidea Posted 11:15 pm
10 Jun 2008
Given that I don't have punch in or out at a certain time, one might say it is my patriotic duty to work four ten-hour days and permit others who are less fortunate to use the gasoline.
Sounds like a suitable topic for a social marketing campaign that could significantly reduce our nation's dependence on fossil fuel very quickly. Perhaps our Federal government and a prominent environmental organization could get the ball rolling on this.
Thank you for the reminder and constructive criticism!
I very much appreciate it.
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wiscidea Posted 11:29 pm
10 Jun 2008
However, we have to live with the decisions we made, not the decisons we wish we made. Mistakes were made. No point in playing the blame game... except to make sure we don't repeat the mistakes. Other cliches I might trot out?
Now, if going back in time were an option...
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hapa Posted 12:09 am
11 Jun 2008
however if the 4-day week helped, don't thank me, that's an old idea.
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wiscidea Posted 1:04 am
11 Jun 2008
A four-day work week would have numerous advantages. Not only would it reduce fuel consumption, it would reduce wear and tear on the roads, reduce the number of cars flowing into and out of areas, require less infrastructure, permit traffic to flow more quickly. I'm sure there are more benefits.
Problem... employers are probably already demanding extra hours from workers. Actually SCHEDULE them to work ten hours each day and businesses would no longer get 50 hours a week out of them. Just my opinion.
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Gar Lipow Posted 1:42 am
11 Jun 2008
A four day work week - yeah a good way to cut transport cost. Also while telecommuting is not for everyone, a substantial minority of the population could work almost entirely from home (with an ocassional trip to the office). A larger minority could work at least one day a week from home. How big either minority really is I don't know. About half the working population have desk jobs, but "desk job" includes stuff like receptionists that still has to be done entirely in person. Also a lot of work is essentially collaberative, and requires informal in-person contact. Also there is a fair amount of telecommuting going on now (a lot of tech support for instance), so it is not like none of the potential is used. I'll bet someone has done a study, on the real potential for what is already being done. Even if only 10% of work hours done in person could be switched to telecommuting that is a substantial reduction in travel energy. And the reason a lot of stuff that could be done via telecommuting is not is managerial resistance.
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Gar Lipow Posted 1:48 am
11 Jun 2008
Looks like 19% of workers telecommute at least part of the time. A lot of that is self-employed and contract. About 8% of direct employees do the same.
Wonder how much unused potential that really leaves. Some I'm sure. Managerial resistance is well documented...
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Jon Rynn Posted 1:58 am
11 Jun 2008
Now that's a revolution! Sort of like...Levittown was a revolution. I was thinking, 400 sq ft per person, maybe 500 sq feet while we're fantasizing...
But I do think that the entire car issue is inextricably linked up to the entire urban issue, that is, cities have been allowed to go to hell, and aren't attractive -- or if they are, like Manhattan, they've become prohibitively expensive. So $150,000 per city home (and you could have a garden even in an apartment building), that's a good slogan.
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hapa Posted 4:51 am
11 Jun 2008
i thought tech -- software -- would develop to make an offsite person's presence more present. i'm a little surprised, considering the relative wealth of the people to whom this ... ah! i know what happened! lawyers, accountants, programmers, none of the geeks care about eye contact videochat! an email, a phone call.
oh, was i disappointed that the new iphone has no videoconferencing. oh oh oh. i thought maybe that would get things moving. but maybe there's a battery issue.
if there are more days to be found out there, the question is, how much will it grow. nursing from home? warehouse work from home? plumbing from home. maybe an LCD screen on the counter at macdonalds and your order is taken by someone in india? who doesn't eat meat. or... the haunted drive-thru! nobody at the window.…
and the customer drives-thru from home. and the burger is eaten by someone somewhere else. vegetarian offsets!
the other thing, brought up in that talk about cleantech finance, was making sure you unhook estimates of telework growth potential from past results, largely driven by the wandering and once-hugely-growing herd of software engineers. bricks-and-mortar is the future.
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hapa Posted 5:08 am
11 Jun 2008
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Wolverine Posted 6:52 am
11 Jun 2008
And remember folks, the U.S. does NOT have HIGH gas prices; actually, they're very low compared to the rest of the world in raw numbers, and most people don't earn as much as Americans. Just wait till U.S. prices catch up with those everywhere else.
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Jon Rynn Posted 6:53 am
11 Jun 2008
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hapa Posted 8:08 am
11 Jun 2008
we don't have rentable cubicles here anymore, not like during the tech bomb. boom. sorry. now we get articles in the RSS feed describing the right tip and the right amount of food to get when renting tables.
but we do still have ghostly offices, and it's not even that strange, it's like an epidemic of press rooms, except they're nowhere near newsworthy events. or maybe it's like the train station. lots of people go through but nobody stops there for long except the clerks and cleaning crew. it's very space efficient. was it impacting local landlords? (do i care?)
then you rent a meeting room.
yeah -- i agree -- more vested interest and say would build in more trust between people -- and also probably solve some of that "i can't excel because i'm invisible" stuff because the process of moving up would be more -- um -- transparent -- and being involved in the major decisions would keep you in the game.
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