Demand for Gasoline May Be Relatively Price Inelastic But Eventually....

Businessweek reports that Americans appear to be burning less gasoline as a result of driving less. To wit:

Traffic levels are trending downward nationwide. Preliminary figures from the Federal Highway Administration show it falling 1.4% last year. Now, with nationwide gasoline prices having recently passed the inflation-adjusted record of $3.40 a gallon set back in 1981, the U.S. Energy Information Administration (EIA) is predicting gas consumption will actually fall 0.3% this year. That would be the first annual decline since 1991. Others believe the falloff in consumption is actually steeper than the government's numbers show. "Our canaries out there tell us they are seeing demand drop much more considerably than the fraction the EIA is talking about," says Tom Kloza, chief oil analyst at Oil Price Information Service, a market research firm in Gaithersburg, Md.

Back in 2005, Goldman Sachs issued a report that suggested that demand for gasoline was not so much tied to price per gallon as percentage of income. As Reuters reported:

During 1980-1981, gasoline spending in the United States corresponded to an average 4.5 percent of GDP, 7.2 percent of consumer expenditures, and 6.2 percent of personal disposable income.

The report added that at around $100 per barrel for oil, gasoline spending in the U.S. reaches 3.6 percent of forecasted GDP, 5.3 percent of consumer expenditures, and 5.0 percent of personal disposable income. Still not as high at the bad old days of the 1970s and early 1980s.

The Goldman Sachs report also suggested that the price of oil might have to reach $135 per barrel before consumer expenditures on gasoline as a percent of income would reach levels comparable to the 1970s. Yesterday, the price was north of $118 per barrel.

According to Reuters Goldman Sachs' researchers concluded:

``Perhaps the ultimate answer to high how oil prices need to go before demand destruction occurs is derived from knowing when American consumers will stop buying gas guzzling sport utility vehicles and instead seek fuel efficient alternatives.

``Based on our analysis of gasoline spending and the economy noted above, we estimate that U.S. gasoline prices may need to exceed $4 per gallon.''

The Businessweek article notes:

Just look at the latest auto sales figures. Sales fell 8% overall during the first quarter of 2008, and those of gas-guzzling large SUVs and pickup trucks dropped off a cliff, down 27% and 14%, respectively.

Whole informative Businessweek article is here.

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  • ||

    This has nothing to do with pump prices; people are altruistic by nature and the relentless pursuit of ethical human dignity impels them to do the right thing.

  • ||

    If President Clinton 2.0 issues an executive order setting the price of a gallon of gasoline at $.29, people will continue to curtail their driving, because it's the noble and altruistic thing to do.

  • ||

    At just $.29 per gallon, just what gasoline would you be talking about? While such a position might get her a ton of votes, there'll be no gasoline for sale until the feds nationalize the oil production and refining industries.

  • ||

    Why do they keep saying "need to exceed $4 per gallon." ??

    It's been well over $4/gal for over a month around Seattle if you use diesel or premium . . . Must be east coast or midwest they're talking about.

  • James||

    Perhaps the ultimate answer to high how oil prices need to go before demand destruction occurs is derived from knowing when American consumers will stop buying gas guzzling sport utility vehicles and instead seek fuel efficient alternatives.

    Won't never happen, the American way of life is non-negotiable. Americans need to drive big SUVs. The only way to reduce the price is to set a price cap on gas, and put a windfall tax on the oil companies.

  • ||

    From the article:

    Sales [...] of gas-guzzling large SUVs and pickup trucks dropped off a cliff, down 27% and 14%, respectively.



    James: the American way of life is non-negotiable. Americans need to drive big SUVs.

  • ||

    Brian Courts has it right. With the gas crunch of the 1970s, America, the #1 consumer of vehicles at the time, latched to the compact car. Toyota is now the #1 manufacturer in the world. Coincidence? I think not.

  • TallDave||

    Cellulosic ethanol looks better every day.

  • I absolutely can\'t tell||

    who in this thread is kidding, and who is serious

  • NoStar||

    Higher gas prices have not reduced my time on the roads, but I have switched from my pickup truck to my motorcycle for most trips. Started this back in Febrrrrrrrrrrrrrrruary and even now, it is a bit cold in the mornings.

    On the other hand, my daughter loves being taken to school on the bike no matter what the weather. You can see the envy on her friends faces.

  • e||

    It could be worse, look at how badly things are turning out in the Socialist workers' paradises :

    With $8-$10 gas, Europeans drive less, use more transit, bikes

    "Better cars, less intensive use of cars has meant overall
    consumption of fuel in Europe has been going down steadily over
    the last three years," said Pierre Noel, an energy researcher at
    Cambridge University in England.

    "We are much better equipped than the U.S. to deal with higher prices
    and a more volatile market because we are so much less oil intensive
    than you are," said Noel, who bikes to work.

  • ||

    And even better article from bizweek..

    "There is no gas shortage

    Gas prices are up because of speculation, just like real estate and the dot com bubble.

  • Michael Ejercito||

    A price cap on gas would definitely make it cheaper.

    What would be the side effects?

  • lower case j||

    With the gas crunch of the 1970s, America, the #1 consumer of vehicles at the time, latched to the compact car. Toyota is now the #1 manufacturer in the world. Coincidence? I think not.

    Japanese mechanical engineering is excellent. What is sold in the US as the Tundra, is world's work horse. It will drive over crappy roads for over 200,000 miles. Gas mileage is not it's primary attraction.

  • ||

    Just curious: Has Ronald written any articles that do not feature "To wit: ..."? As a former editor, I feel obligated to point out its excessive use (arguably incorrect usage, for it was primarily a legal term for "namely" and generally appears in the middle of a sentence).

    Not that I don't enjoy your articles, Ronald...

  • F.Nevis||

    Americans have become such pussies. I wonder how long will it take till the moment when we all start wearing pink and eating candyfloss?..

    Stop whining. Norwegians pay about $10 per gallon. And they are not only not complaining about that, but increasingly encourage.

    http://www.aftenposten.no/english/article2357735.ece

  • ||

    Jay: I agree that I overuse "to wit." Not only does it mean "namely," it also signifies "That is to say." Suggestions for shorthand ways to introduce long quotations?

  • ||

    You guys are all joking, but get ready for some Soviet style lines (and get ready to pay some Soviet style bribes) when the duel policy of price-controls, along with "windfall profits tax" (a.k.a. the "Send That Fuckin' Oil to China, Not the U.S.!" plan) comes into effect. That ain't no joke!

  • ||

    Ronald: When considering the format of these blog posts with the quotations clearly defined by vertical lines on the left edge of the paragraphs, you could probably shorthand it with only a colon (as you do throughout most of the article anyway). For example, "Businessweek reports that Americans appear to be burning less gasoline as a result of driving less:"

    You've covered your bases there, I feel.

    Other options to consider:

    --[He, They,] wrote: (some journalists and news editors prefer to use present tense for quotations, e.g. "He writes:", but that's a matter of style for the effect of immediacy. I prefer past tense for its accuracy. Either is correct. But some will say to avoid using these constructions to introduce quotations - you cannot please everyone!)

    --Consider: (or Consider the following:)

    --An excerpt:

    --Check this out, dudes: :)

    --Voila: (unsure about this one ... could be a style choice. Nothing like a little French to liven up a post, eh?)


    I don't know ... maybe there's a good Latin alternative as well.

    Anyway, I was only pointing out a crutch phrase you use; I have roughly a half-billion of my own, too. I like it when mine are pointed out. I'm unsure if "That is to say" is appropriate for introducing long quotations, though.

    Well, good luck. I won't harp on you for it again. :) Keep writing fab articles.

  • ||

    Jay: Thanks much for your suggestions. I don't promise to completely eschew "to wit" but I will use it more sparingly. :-)

  • ||

    Don't worry. When Sen. Obama (D-Buyer's Remorse) is elected, hope and change will extend all the way to the gas pump, yes it will. Prices will drop *and* we'll drive less, 'cause we're just not going to do things the way they've always been done in Washington. (And gas stations will have attendants in crisp white uniforms to pump your gas and was your windshield.) It will be a great new day in America.

    You'll see.

  • ||

    Gasoline use is relatively inelastic for several reasons.

    (1) Transportation is very important. Although people do drive for recreation, most driving is necessary and can't be avoided just to save money.

    (2) Changing fuel consumption dramatically means altering one's vehicle. That takes a lot of time. Cars are the second most expensive purchase people make after homes. They can't switch on the fly. Selling a vehical at a loss to buy a more fuel efficient one usually doesn't pay in the end. People by more fuel efficient vehicles only when they would have purchased a new vehicle anyway.

    (3) Fuel prices and especially the rate of change in fuel prices isn't that dramatic. Fuel is a minor item in peoples budgets. For most people, the change in any given month could be absorbed just by not eating out for one meal. Gradual changes do not provoke a significant change in behavior short term.

  • Billy Beck||

    "Why do they keep saying 'need to exceed $4 per gallon.'??"

    Because they need you to mend your drunken ways, dummy.

    Sheesh.

  • ||

    Thank god finally someone is talking about the 'percentage of income' stat.

    The CEILING of oil prices that US consumers can sustain, continues to rise, due to technology, economic growth, etc.

    Today, the ceiling is about $100. By 2010, it will be abotu $120. By 2020, perhaps $200. After that, infinity, as jsut too many technologies are cheaper than oil, and have had time to reach the market place.

    Read this detailed article on how $120/barrel Oil has far more positives than negatives, and how that is the optimal price for the best combination of 'pros' on technology, economics, foreign policy, etc. without the 'cons' becoming too troublesome.

  • ||

    Americans have become such a fat, pampered, whiny group of wusses that I actually WANT a sharp, deep recession and expensive oil prices, just to whip Americans into shape, and get them reacquanited with concepts like sacrifice, delayed gratification, eating fruits and vegetables, and living within their means.

  • ||

    P Brooks: This has nothing to do with pump prices; people are altruistic by nature and the relentless pursuit of ethical human dignity impels them to do the right thing.

    Obviously intended to be ironic. People are, by nature, selfish; they occasionally allow altruism to come through ... and almost always in a way that draws attention to themselves so they may receive due credit. In other words, they are altruistic for selfish reasons.

    Gas as a percentage of income as an indicator of demand makes perfect sense. Or a less mathematical model is this: when the price of gas forces some to sacrifice other things, then behavior changes.

  • ||

    "Gas as a percentage of income as an indicator of demand makes perfect sense. "

    Indeed. Also, a very underapprciated aspect of economics is the favorable *deflation* that electronics provides.

    The cost of a 42-inch Plasma TV has dropped from $8000 in 2003 to $1000 today. Thus, as a percentage of income, it has plummeted. A person's purchasing power, as measured by Plasma TVs, rose a lot.

    1 GM of RAM, 1 TB of Storage, etc. all drop in price by 30-40% a year, thus shrinking as a percentage of income, and making income rise a lot if measured by those units. Sure, new applications keep requiring more memory and storage, but these new applications are voluntarily adopted because they presumable are desirable due to improving living standards/productivity/entertainment, etc.

    Thus, the rise in oil price as a percentage of income is being offset by the drop in all semiconductor/storage/display/wireless technology as a percentage of income. This race might be temporarily won by oil in the short term, but will be won by technology in the long term.

  • ||

    Todd ... true, but electronics are not essentials, while food certainly is, and gasoline is nearly so if it's a means to achieve income to purchase food. For some, lower-income people in particular, foregoing food purchases is nearly impossible while a 42" flat panel TV would be expected.

    I'd be very curious to see how purchases of non-critical food -- Coca-Cola, bottled water, frozen pizza, chips and snacks -- track with the rising cost of food staples and gasoline.

    I would *think* that those non-essentials might be the first to go. But perhaps the utility they provide is greater than I suppose.

    I wonder also how much of the rising cost of food and oil is, at least in the short term, finding its way onto credit cards. In other words, spending habits are still fixed but the excess cost is merely turning into credit liability.

    Yes, technology may -- will? -- one day address the oil dependency issue. And of course high oil prices facilitate innovation. $10/barrel oil would mean Alberta would be very quiet.

  • ||

    Yes, let's set a cap on gasoline prices. And let the gas lines begin! Or, let it go to $6 per gallon like they've had in Europe for the last few years, and watch vehicles get downsized accordingly.

  • ||

    Oterh ways to adjust - I need to drive 7 hours to visit family 2-3 times a year. Have always taken the family soccer mom mini-van. Gets about 20 mpg. This weekend my wife and daughter visited for baby shower - instead of the van took my sons small car which gets 32 mpg. Big difference in cost from the switch.OF course the small car would have been crowded if my son and I went, but we ditched the shower and plan on eating pizza and subs all weeekend - with the money saved on gas its like free food!

  • ||

    " true, but electronics are not essentials"

    I don't agree at all. Try getting by without a PC, Internet Connection, or Cellphone for 2 weeks. It can't be done.

    On the other hand, people could eat more fruits and vegetables that are cheaper anyway. They could carpool, they could take the bus. Most people could easily cut their gasoline consumption by half, if they make these sacrifices.

  • John D||

    If you appreciate irony, or just want a laugh, go over to Youtube where the Democrats have put up clips of their members making speeches on the floor of the House demanding LOWER gas prices.

    They have some suggestions, like...removing all tax exemptions from the oil industry and making it more expensive to find new oil. (Not that they would allow it to be pumped).

    Yeah, I'm no fan of subsidies, but I'm not clear on how making it more expensive to do business will result in lower prices. But then, I'm not a Congressman.

    Speaking of which....

    My Congressman, Peter DeFazio (D-Labor Unions), also wants to file a complaint against OPEC with the WTO. I'm not sure what exactly he expects the WTO, which has no enforcement powers, to do. But it shows the Democrat's overwhelming faith in the power of bureaucracy.

    As does the third suggestion he had.... [drumroll please]..... Increased government regulation!!!

    The exact same remedy that has been pushed by the Democrats for every other problem.

    Tax and regulate....It doesn't matter what the problem is supposed to be, you can depend on the Democrats to push for these two solutions.

    The sad thing is, there are actually people out there that will watch that, nod their heads and say, "that sounds like a good idea to me."

  • ||

    Fuel prices are almost directly related to supply, China's buying more, so it costs us more. Throw in the sinking dollar, and prices rise again. Economics is not hard to figure. Government is supporting healthcare, and it costs are in the stratosphere. Go figure folks. Government is mandating designer fuels. We have had CHANGE already, bet you idoits haven't had enough yet.

    FYI, My 5700 pound V8 Gasguzzler gets 25mpg on the highway at 80 mph. I know engineering. Cars can be made to go further on a gallon, but it costs alot.

  • Hat Pines||

  • Hat Pines||

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