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November 18, 2005

Inelasticity? It's a Stretch

It may come as a bit of a surprise:  despite rising gas prices over the past few years, total consumption of highway fuels in the US has actually increased, rather than fallen.  Some have seized on this phenomenon -- prices and consumption rising in tandem -- to suggest that changes in gas prices have no discernible effect on how much gas we actually use. 

The idea that gas prices have no effect on consumption doesn't accord with economic theory, to put it mildly.  And this Excel spreadsheet (courtesy of Charles Komanoff and the ever-informative Todd Litman) sheds some light on what's really going on.  Apparently, even as US gas prices have risen, so have population and GDP.  And GDP growth tends to push consumption levels up -- in fact, over the short term, gas consumption seems to be more responsive to changes in GDP than to changes in prices.

The spreadsheet tries to tease apart the two competing forces, and finds that -- all else being equal -- each 10 percent rise in gas prices is, in fact, accompanied by a 1 percent decline in gasoline sales within a year. Which suggests that, had gas prices remained stable over the past few years, consumption would have risen even faster than it did.

It should come as little surprise that, over short time horizons, substantial gas price hikes only reduce sales a small amount.  People have only so much flexibility to reduce their gas consumption over the short term -- a fact that economists have understood for years. 

But what remains to be seen is whether a sustained increase in gas prices will be accompanied by deeper declines in sales, as people begin to change houses, jobs, or cars to account for higher transportation costs.  That's what economists predict will happen; but  we'll just have to wait to see how well reality matches up with theory.

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Comments

A sustained increase in gasoline cost will occasion revisions in the budgets and aspirations of those on the bottom of the ladder. It will deny to them the flexibility to pursue employment further away from home, thus cementing them in their class.

Posted by: Walter E. Wallis | Nov 20, 2005 8:00:44 PM

That is, Walter, only if society does nothing to replace the automobile. Why so pessimistic or assuming that society is so lacking in vision?

Posted by: Dan Staley | Nov 21, 2005 8:11:48 AM

"It will deny to them the flexibility to pursue employment further away from home, thus cementing them in their class."

... I think that is overstated. For the people at the bottom of the ladder, buying and maintaining a car that runs okay is still a much bigger burden than buying gas. At $3.00 per gallon, fuel is still only about 25% of the cost of owning and running a car. Getting to work is a necessity. Those who can get a job that pays decent wages will find a way to pay the commuting costs and cut back on something else.

Posted by: sf | Nov 21, 2005 8:23:52 AM

To say that a great spike in gasoline prices will disproportionately affect the poor seems entirely uncontroversial to me. So I wonder why it has elicited such an adverse reaction in both of the following comments.

Dan, I don't think Walter was saying that nothing can or will be done. He was merely pointing out what's happening right now: poor people are having to make really tough choices if they currently work far from home. Maybe they're feeding their children less (or less nutritiously); or perhaps they're foregoing that prescription refill with the $15 copay for their sick infant. (If they can afford insurance in the first place. That refill will cost $50 without it.)

SF, it may be that fuel represents a relatively small proportion of the cost of car ownership, but 25% of our second-largest expense item is nothing to sneeze at; and, what's more, much of the total consists of fixed costs which the owner has already figured out how to pay (presumably); but when you're working within a very small margin--which is what it means to be poor--sharp rises in the variable costs make a huge difference, even if they are small compared to the fixed costs.

All of this seems almost too obvious to be worth mentioning. I do so to offset a harsh disregard for the plight of the poor which occasionally reveals itself around here.

Posted by: Sam | Nov 21, 2005 9:41:02 AM

"All of this seems almost too obvious to be worth mentioning. I do so to offset a harsh disregard for the plight of the poor which occasionally reveals itself around here."

On the contrary, Sam. You'll notice many posts here about densifying or opening up opportunities for housing downtown; this narrows the live-work space gap and allows the poor to spend less of a percentage on transport.

Just because outcomes aren't trumpeted doesn't mean there's a disregard. That logic is like me saying there's a disregard for the environment in this post because an outcome of weaning the country off of fossil fool may be cleaner air, but the post doesn't mention it - hence, a reckless disregard.

One must remember there is a reluctance in our society to mix income classes - one of the reasons for gated communities. Trumpeting outcomes like priveleging the poor in policy measures inevitably brings opposition, which may kill a policy proposal. One must be careful in this country how outcomes are framed.

Posted by: Dan Staley | Nov 21, 2005 10:21:31 AM

Dan, you make some good points but they don't apply to the case I was trying to make, though I think that was your intent. I did not say, nor do I think, that this blog or NEW completely ignores issues related to poverty. Several of NEW's reforms speak to it directly, not to mention the economy indicator in the Scorecard. Nor was I suggesting that poverty issues ought to be "trumpeted" on this blog (though I think more attention to this crucial dimension of sustainability would be all to the good).

Rather, I was remarking on the tone with which Walter's original and, I think, totally uncontroversial comment was met. I have noticed before (and commented on this) that there seems to be a disconnect between people who are concerned primarily about ecology and the social justice aspects of sustainability. I don't see these as "either/or" but as "both/and" domains.

I also have the conviction (which I have expressed before on this blog) that we white, middle-class (or higher), educated, urban folks have a serious blindspot around class. We too easily dismiss the woes of the poor; too quickly decide that equity issues are of lower importance than ecological ones; and retreat a little too blithely into the comforts of our privileged lifestyle.

Really, my intent is not to be personal, so please don't take offense. But I think there is a very touchy dynamic here. Sustainability, if we really are to achieve it, will depend on people's willingness to share more of the pie--which means, don't you know, the more lucky among us giving up some of what we currently enjoy. Those of us with something to lose are not at all comfortable with this and we go to great lengths to pretend it's not so.

But so long as we pretend that true altruism (which includes the scary aspect of giving up some of our privilege) is not required, we are subverting our own highest dreams for this place.

Yes I understand, Dan, that this kind of talk doesn't fly in mainstream politics. I certainly don't expect NEW to campaign for a wholesale redistribution of wealth throughout Cascadia. But all of us would do well to remain keenly sensitive to this aspect of sustainability; and, it seems to me, precisely because politics is the way it is, we must continually push the envelope in the direction of more inclusion and more equity.

Then, someday, we might get where I think we all want to go: a more free and more fair society that can last.

Posted by: Sam | Nov 21, 2005 12:30:57 PM

Ah, got it, Sam. I agree completely. I've fired the editor that looks over my comments. Again.

There certainly is some merit to criticisms that state some environmentalists don't want to give up their pie piece; I think this speaks more to the complexity of the issue - including causation and fixes as well as interest groups wanting to maintain *their* piece and inserting wedge astroturf here and there.

BTW, finally getting around to reducing the book pile and started "One with Nineveh" (1), which says much the same thing you said.

Best regards.

(1) http://www.stanford.edu/group/CCB/Pubs/books/nineveh/nineveh.htm

P.S. Paul and Anne have a list in the Intro [IIRC] regarding what must be immediately done to reverse ecological decline and achieve sustainability. It almost seems as if the current and immediately past Administrations are doing the exact opposite of the list of things to do...

Posted by: Dan Staley | Nov 21, 2005 1:23:12 PM

We need to end use of fossil fuel - urgently!

Huge deposits of methane, a greenhouse gas 20 times more potent than carbon dioxide, are locked in permafrost, which is beginning to melt quickly all over the world. Within the past five years the surface permafrost in an area in Siberia the size of France and Germany combined is melting for the first time since the last ice age, 11,000 years ago.

Methane released from melting permafrost could quickly eliminate most life in the Arctic. As the methane drifted south, it could threaten all life on earth.

Present efforts to slow global warming fall tragically short of what is needed. We may be facing a little-publicized planetary emergency.

The very hope for the survival of human life requires an extremely rapid end to dependence on oil, gas, and coal, whether or not we have reached peak extraction of these resources. Those with vested interests in the oil industry must recognize their most important interest is life itself.

During World War II, the US produced armaments in quantities that would have been unbelievable a short time earlier. To slow global warming, a similar effort to develop breakthrough systems to produce energy, as well as rapid expansion of all current carbon-free energy technologies, must become an urgent priority.

Our own firm, Magnetic Power Inc. in Sebastopol, CA, is developing generators based on new science that convert Virtual Photon Flux (VPF) into electricity without fuel.

Our website is under construction and will soon be up, but Google can readily provide a sense of how far along we are at present. Note that until last week we thought the source of the energy we are converting was the Zero Point field. That now appears less likely. We believe it is most probably the VPF.

When our Magnetic Power Modules demonstrate the ability to be used for local driving, with enough support by the end of next year, we believe the price of oil may begin to fall. Once such generators are in mass production, the decrease might be dramatic.

Posted by: Mark Goldes | Nov 22, 2005 9:16:16 AM

I have watched 50 years of alternatives to the car fall flat on their faces. Closest was "Dial a ride" in Santa Clara County. Best was the jitneys on Mission Street in SF.
Set criteria - How far are you willing to walk to your transit thing? How long are you willing to ride on the transit thing? How far are you willing to walk from your transit thing to your job?
I have never in 50 years known anyone who could car pool who did not. I have never known anyone who could ride transit who did not. In 50 years I could use transit for 3 months.
You get people out of cars only by punishing drivers, and lots of transit advocates want to do that. I remember when Willy Brown made a thing of riding Muni to work - with his limo following behind.

Posted by: Walter_E_Wallis | Nov 22, 2005 2:25:20 PM

From a policy enactment point of view, one should pay attention to what Walter says just above.

Although it is well known how far people prefer to walk, the underlying message of his comment is powerful.

Just giving compelling numbers won't change anything, nor will guilt, nor will e-mail campaigns.

And from where I sit, you have to get people out of huge pickups [4 doors, long bed, lifted, headers, diesel, bull bars, American flag, support the troops ribbon]. Not sure how that's gonna happen, but I'm trying anyways...

Posted by: Dan Staley | Nov 22, 2005 4:26:52 PM

I think people are more ready to make changes in the way they travel than we give them credit for.

Check out work the city of Portland has done with TravelSmart. (www.gettingaroundportland.org)

To summarize TravelSmart, it identifies people who are interested in making changes in specific trips they make and empowers them to do just that, by giving information and small rewards. Typically, these projects show an 8-10 percent reduction in auto trips in the target area, with great increases in alternative mode use. About 2/3 of the people contacted are interested in participating, much higher than one would think.

We need to give people more credit. Yes, there are those motorheads who wouldn't give up their cars if you held a gun to their head. But, most people aren't like that. They've grown up in a country where the car was the only mode most people knew. Give them a bit of education about how bus systems work or where bike lane networks go and they'll use them. TravelSmart proves this.

Other posters are right...shaming people or implementing a bunch of disincentives won't bring about lasting change. Empowering people will.

Posted by: Dan | Nov 22, 2005 7:34:03 PM

Psychologically, one of the most powerful ways of encouraging a behavior is to reward it intermittently. This has been shown time and again. Let’s apply that to gas prices, shall we?

Every once-in-a-while, the price for gasoline goes up sharply. This causes people to gripe and moan, and start thinking about adopting a new mode of travel or moving to a location closer to where they work, shop and recreate rather than having to pay the high price of filling up.

But then, like magic, the price of gasoline goes down again.

So, everyone relieved, they go about their lives, glad that that episode has passed.

Not long later, say, just before Memorial Day, the prices go back up. “Oh, no,” people say, “the price is going up again.” But, they weathered the storm before, so maybe they’re less serious about changing mode or moving. And, like magic, the price of gasoline goes back down.

Well, not as low as it was. “But,” they say, “it’s not nearly as bad as last month!”

Every cycle we experience in the cost of gasoline at the pump contributes to a sense that it’s a short term problem, and a couple of months later people are rewarded with lower prices. This also contributes to Americans’ willingness to use gasoline regardless of its price.

I’m not disagreeing with the conclusions of this document. I am, however, saying that there is a pattern to gasoline pricing which contributes to America’s disregard for the cost of gasoline. If this were not the case and people knew it was going to be at a higher cost over the long term, rather than merely in these small cycles, that is when people will start seriously considering mode change or relocation.

Posted by: Brian S. | Dec 1, 2005 11:15:19 AM