Why you'll pay to keep driving.

The search for better economic policy.
Sept. 27 2005 12:54 PM

The Grip of Gas

Why you'll pay through the nose to keep driving.

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President Bush called on Americans to drive less yesterday in response to the "disruption" caused by the Gulf of Mexico hurricanes. Will they? High fuel prices make the question a natural one. Conservation advocates, along with policy-makers and the press, have been grasping for evidence that the answer is yes. Here's what they've collected so far: Toyota's announcement that Hurricane Katrina boosted demand for hybrids, the D.C. Metro's strong ridership last month, and a report of large SUVs sitting unsold on a car lot in Texas. Unfortunately, the economics suggests a pretty clear answer to what this adds up to: not much.

In repeated studies of consumer purchases over the years in the developed world, drivers in the United States consistently rank as the least sensitive to changes in gas prices. Even when gas gets expensive, we just keep on truckin'. The latest estimates, based on a comprehensive study released in 2002, predict that if prices rose from $3 per gallon to $4 per gallon and stayed there for a year (far greater and longer than the impact of Katrina), purchases of gasoline in the United States would fall only about 5 percent.

Why don't we ratchet down more when fuel prices go up? The rule of thumb in economics is that people react to price increases only when they can turn to substitutes. Raise the price of Ford trucks and sales go way down because you can buy your truck from Chrysler or GM or Toyota instead. Raise the price of gasoline and what are the alternatives? As a New York Times article pointed out on Sunday, people can't change the type of fuel they put in their cars, and they can't stop going to work. They might take one less driving vacation or check their tire pressure more often when they fill up. But that hardly makes a dent in the total numbers.

Gasoline purchases are, in fact, the kind of buying affected least by price changes because they are so closely tied up with other things we already own. When you buy a $1,000 digital camcorder that uses a specific brand of tape, you lock yourself in. If the cartridges get expensive, you have to eat the increased cost until you buy a new camcorder. Gasoline follows the same pattern. In the last two decades when gasoline was cheap, Americans switched from cars to minivans and SUVs, seriously reducing their gas mileage. Also, many moved farther from their places of work­, to suburbs and then ex-urbs. In the 1990s, the average commute time rose about 15 percent, and the share of people commuting alone rose dramatically to more than three out of every four American workers, according to the 2000 census. As jobs moved out of central cities and into suburbs, car-pooling became more difficult and public transportation often unavailable. Less than 5 percent of the population regularly uses public transportation to get to work now (and even that number includes people taking taxis). In Europe and Japan, people drive less when the cost of gas goes up because they still can. On average, they live closer to their jobs. About 20 percent of Europeans walk or ride their bike to work (more than five times the share in the United States).

Practically speaking, the only hope of changing America's driving habits is a hefty price increase that lasts. For, oh, five years. The data show that after that long, even the response of American drivers to higher prices can be pretty sizable. Five years gives people the time to come up with substitutes. Higher commuting costs over that many years could induce you to buy a smaller car, move closer to work, find a car pool for your kids. Of course, that's why Hurricane Katrina is not likely to have a lasting impact on gasoline use. It's a big blip, but only a transitory one. Which means it's exactly what consumers don't change their behavior for.

Think about the choice between the hybrid and gasoline versions of the Toyota Highlander SUV. At the moment, the hybrid costs about $9,000 more. Optimistically it could double your gas mileage from 17 to 34 miles per gallon (if you only drove in the city, say). A family driving the average of 12,000 miles per year would use about 29 fewer gallons per month with the hybrid. Even if the hurricane drove the price of gas to $5 a gallon for three months, the hybrid would only save them about $441 total over that time. The savings just don't add up in the short or medium run. For the average family to justify the hybrid at its current price based on fuel savings, gas prices would have to stay at $5 per gallon for several years. Or, if prices stay where they are, the savings would eventually add up if you kept driving your hybrid for a few decades.

With time horizons like this, it's no wonder that few people change their behavior when gas prices spike temporarily. Even the oil crisis of 1979, the biggest ever, did not have much lasting impact on America's intensive use of energy. Within five years, prices had fallen dramatically and people took off their Jimmy Carter cardigans and went back to their energy-happy ways. One of the oldest lessons economists have for thinking about what changes consumer demand is that moral exhortation doesn't change people's behavior. Prices do. Except that for a commodity like gasoline, even prices don't do an impressive job.

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