Gas prices hardly affect demand
UC Davis survey says pump costs have to soar a lot before Americans change driving habits
- David R. Baker, Chronicle Staff Writer
Friday, December 1, 2006
Record high gasoline prices haven't made a serious dent in America's demand for fuel, a new UC Davis study suggests.
Soaring prices have prompted Americans to cut back their driving only slightly. Further, drivers changed their ways less during the most recent shocks than they did during the period of skyrocketing gas prices of the 1970s, the study found.
The research will be presented this morning as part of a UC Berkeley conference on gasoline markets. The study concludes that pump prices have to soar significantly more before Americans change their habits, a finding that has big implications.
Economists and politicians have been debating whether raising taxes on gasoline would help cut demand, easing the country's dependence on oil and fighting global warming. The study suggests that only a very large tax -- one so high that it would probably be politically impossible to enact -- could have a significant effect.
"I would advocate for a tax, but I'm also a realist, and I know it would never work," said Christopher Knittel, a Davis economist and one of the report's co-authors. "It's hard to get a 10-cent gasoline tax passed, much less one over a dollar."
The Davis study examined two periods of rising prices: 1975 to 1980 and 2001 to 2006. In each, it examined the "elasticity" of demand -- the amount that gasoline use changes as prices rise or fall.
For every 10 percent increase in price during the late 1970s, demand fell 2.1 to 3.4 percent, researchers found. But in the past five years, every 10 percent price increase drove down gasoline purchases by a mere 0.34 to 0.77 percent.
The findings fly in the face of what some energy economists expected. As gas prices rose to record heights in the past two years, experts reasoned that rising prices would eventually force drivers to cut back on trips and fill up less often.
The prediction came true. But the change didn't amount to much.
Demand for gasoline usually increases 1.5 to 2 percent each year. In January and February of 2006, it actually fell, by less than 1 percent, according to federal data. But then it started rising again, averaging between 0.5 and 1 percent most months.
"It was growing slower, but it was still growing, and considering how much higher prices were, people were really surprised it was even growing at all," said Doug MacIntyre, senior oil market analyst with the federal Energy Information Administration.
Other researchers have found that Americans are making some changes in response to higher gas prices, but the cumulative effect of those changes has so far been limited.
A report released Thursday by Cambridge Energy Research Associates, for example, found that the amount of miles driven by the average American in 2005 dropped for the first time in 25 years.
That decline, however, was less than half of a percent. The report attributed the decline to higher prices as well as the aging of the U.S. population, since elderly Americans drive less than those of working age.
Research showing that use doesn't decline much as prices rise undercuts arguments for higher gas taxes. But gas tax advocates aren't ready to give up on the idea.
Severin Borenstein, director of the University of California Energy Institute, noted that the UC Davis study measures short-term changes in gasoline use based on short-term price increases.
Long-term changes in driving and buying habits are harder to track but matter far more, Borenstein said. And taxes, which stick around year after year, can prompt drivers to make long-term changes, such as buying more efficient cars or living closer to work.
"That's what actually changes auto fleets, housing decisions, political support for mass transit," said Borenstein, whose institute organized today's research conference. "They're right that this is a little piece of that puzzle, but the jump they make on gas taxes is a stretch."
Why the difference in gas consumption patterns between the 1970s and the current period? It could be the result of suburban sprawl, as more Americans buy homes miles away from work.
"We tend to live farther from our jobs now, so if the price of gas goes up, I'm still forced to drive to work," Knittel said. "There's not much discretion."
The difference also could be connected to the rising number of dual-income families. "Now it's two people who can't change their behavior," Knittel said.
Driving ahead
Americans aren't cutting driving much as gas prices rise.
-- From 1975 to 1980, demand fell 2.1 to 3.4 percent for every 10 percent gas price increase.
-- From 2001 to 2006, demand dropped just 0.34 to 0.77 percent.
-- Researchers conclude that only very large gas price increases would cut driving significantly.
Source: UC Davis
E-mail David R. Baker at dbaker@sfchronicle.com.
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