Living Car Free - Is gas demand really inelastic?

Everybody repeats the mantra that "demand for gasoline is inelastic." But if you stop and think about it, this nugget of conventional wisdom may be untrue.

The price of gas has only recently -- for the first time in at least 25 years -- risen faster than overall cost of living. it seems at least premature to declare that gas demand is inelastic.

After all, most of us on this forum prove every day that our need for gas is very elastic, since we don't use any, or use very little, although many of us used to us a lot.



Definitions: (http://www.econ100.com/eu5e/open/glossary.html)

Inelastic Where a small percentage change in price results in a proportionately smaller change in the quantity demanded.

Elastic Where a small percentage change in price results in a proportionately larger change in the quantity demanded.

Are you saying the higher prices will spur less demand? I doubt it, most demand is institutional. The only way the activities of passenger car owners will effect demand enough for their to be, well, an effect, is if the nations' fleet of privately owned cars starts to change significantly. That is overall the majority of cars out there become far more fuel efficient. I don't think there's any way private consumers will/can curb demand in any significant way. People aren't going to voluntarily start driving so much less that it makes any difference and in a lot of ways they can't start driving significantly less. There isn't adequate mass transit, there isn't adequate alternate technologies, social planning is too private car-centric.

I think yes, it is inelastic, because for demand to be reduced on a scale that matters significant nationwide change needs to take place and that simply isn't going to happen without serious government regulation and intervention on a scale larger than anything that's been done since ww2.

Yes. Very, very, very inelastic (http://www.nber.org/papers/w12530.pdf) over the short term.

The short-run price elasticities differ considerably: and range from -0.034 to -0.077 during 2001 to 2006, versus -0.21 to -0.34 for 1975 to 1980.
Meaning that the same supply swings we saw in the 70s could raise prices by ten times as much as they did, on the short term.

I 'spect that, according to the definition of elastic and inelastic, gas demand is inelastic even over the long term.

i.e. i don't see a price going up by 20% causing use to go down 40%. I suspect price going up 100% might cause long-term individual consumer demand to go down maybe 20% as folks try to drive a little less and eventually buy a more efficient car.

I have no research to back it up - all I've got is the impressions of the folks around me.

The popular opinion seems to be that high prices are still temporary and they will fall, eventually. My office mates say things like "somethings gotta give soon" and "i'm trying not to drive my truck so much while gas stays expensive".

5-10 years from now, if gas is still $3+/gal, I expect things will have changed. We are used to and programmed for cheap gas. It will take time, a long painful time, to accept expensive gas.

As an example: My neighbor used to commute (80miles r/t) in an early-90's 30mpg 4-cyl Altima. it rolled over 100k. For "reliability" he started commuting in 3yr old 16mpg Explorer and leaves the altima with the stay-at-hime wife. A few months back they also bought a 1/2 ton 4-door new F150. So they have one person who drives frequently, he uses an expensive vehicle, and they have 3 cars.

We are used to cheap gas and expect it to return.

We have cheap gas. $3 a gallon is nothing compared to most industrialized nations, and I doubt $3 a gallon is enough to make any significant portion of people to change their lifestyles long-term to the point of consuming significantly less gas. It's not that much to absorb for most people except the poor, and the poor don't drive the price of anything.

$3 is expensive - for the US. as far as if it'll change useage habits, well, we may very well find out over the next decade or so.
Cheers

From the Energy Information Administration World Oil Balance Spreadsheet T21 I plotted the average daily supply and demand during the past few years when the crude price rose. It looks like the demand began to flatten in 2006. Whats up with the supply? Is that the peak there in 2005?

Source:http://www.eia.doe.gov/oil_gas/petroleum/info_glance/petroleum.html

Iraq and Katrina are big parts of it. Katrina took out a lot of processing, Iraq took out a lot of barrels being produced.

As I was reading through these posts, I thought of something. It occured to me that higher gas prices may not be such a bad thing in the long run as it may actually cause industry, environmental and personal changes. For example, industry does'nt want to stop making or selling cars, the environment can always prosper from lower emissions and people will eventually adapt and accept new technologies. If gas prices don't decline (for various reasons), car manufactures will most likely have to either vehicles that get far, far better mileage and/or manufacture vehicles that run on alternative fuels, such as hydrogen (although a good percentage of current autos actually will run on hydrogen, it's just cost prohibitive to convert them presently). In addition, a positive result would also be the creation of an entire new industry and the possible conversion (if they're smart enoug) of the current oil and gas industry. This would also improve our air quality in large cities, having life changing results and a positive impact on the health/medical field. And finally, people would progressively and eventually accept and embrace it...it's happened over and over and in society and it will happen again...whether it's for "new and improved" fuels remains to be seen...but I can pipedream, can't I? :)

By the way, me personally, yes I do commute a fair distance to work. It's about 50 miles or so each way, but I carpool and it's 90% highway miles with very, very light traffic. And with about 33mpg in my Taurus I do pretty well on gas. Yeah, it would be great if I/work was closer, but sometimes, it's good not to live too close to your workplace. I may move in the next year or so, but I love living in Fruita, it's just so close to so much great stuff!!!

As I was reading through these posts, I thought of something. It occured to me that higher gas prices may not be such a bad thing in the long run as it may actually cause industry, environmental and personal changes. For example, industry does'nt want to stop making or selling cars, the environment can always prosper from lower emissions and people will eventually adapt and accept new technologies. If gas prices don't decline (for various reasons), car manufactures will most likely have to either vehicles that get far, far better mileage and/or manufacture vehicles that run on alternative fuels, such as hydrogen (although a good percentage of current autos actually will run on hydrogen, it's just cost prohibitive to convert them presently). In addition, a positive result would also be the creation of an entire new industry and the possible conversion (if they're smart enoug) of the current oil and gas industry. This would also improve our air quality in large cities, having life changing results and a positive impact on the health/medical field. And finally, people would progressively and eventually accept and embrace it...it's happened over and over and in society and it will happen again...whether it's for "new and improved" fuels remains to be seen...but I can pipedream, can't I? :)


I hear what you're saying but one thing makes me squirm: cheap commodities (incl energy) = high material standard of living. expensive energy drives up the cost of everything, it's not just driving gets more costly. The company I work for makes packaging material, actually very environmentally-friendly material (4% package by weight of the finished product!) and we've had to raise prices 4 times in 3 years due to higher polyethylene costs, higher trucking costs, etc etc.

I think the true pipe dream is a society of high standard of living, where energy (and cars and Cokes and Levi's and eveything) is inexpensive, but produced and consumed in a responsible manner cause it's the right thing to do. folks could work less and play more and actually get outdoors some.

now there's a far-out concept - do it cause it's the right thing to do!

Sorry, i'll go slap myself and return to reality :)

folks could work less and play more and actually get outdoors some.
What a concept! That's the ultimate luxury.

look at all the inelastic products in the world, what do they all have in common?

what are the biggest and most profitable businesses in the world and what do they have in common?

answer those and tell me energy isnt inelastic?

. Whats up with the supply? Is that the peak there in 2005?


for crude + condensates, yes, yes it is...................

You all make good arguments and you're probably right.

OTOH, most of my motoring friends are already starting to drive a little less. I don't forecast massive moves to carfree living, but I do look for more efficient use of automobiles. Corporate and governmet fleets could do a lot to improve efficiency also -- better routing, more economical vehicles, etc. Some are already staring to insist that drivers not idle trucks and buses at short stops.

Congress (even GOP and my Michigan senators) are starting to talk aout tougher CAFE standards. That would bring a tremendous savings, but admittedly several years down the line, as more economical cars gradually join the fleet. When it comes to thinking about how inelastic gasoline is, two things to keep in mind are 1) there has almost NEVER been an increase in prices that outpaced overall inflation and 2) even a leveling off in usage would represent a decrease from the projected large and long term increases in consumption.

So I guess I'm a contrarian on this issue. I think there will be a reduction in gasoline consumption and it's going to catch the industry by surprise.

OTOH, most of my motoring friends are already starting to drive a little less. .......

1) there has almost NEVER been an increase in prices that outpaced overall inflation ....


The price of gasoline is up about 10 % over the past year but inflation is still down at 3% isn't it? In an oil dependent economy the price of oil and inflation would be so highly correlated that on average we'd expect point 1) to be true.
So, are we now in one of those rare times when gasoline prices are going up faster than the inflation rate? The car people around me seem to be driving just as much as they did last year. I was asked to ride along in an SUV last week, AC cranked with the windows down for a three block trip.

http://tonto.eia.doe.gov/dnav/pet/hist/mg_tt_usw.htm

I should have said:

there has almost NEVER before been an increase in prices that outpaced overall inflation

The previous exception was the oil embargo in the 1970s.

It is my understanding that, although Gas prices have risen with inflation, wages have not. But seeing as how I have no quantatative data, I can not prove that assertion. My folks comment on how it used to be possible to raise a family on one persons income, but that it is no longer possible/practical because wages have not increased to match inflation. I have to wonder, though, if the inability to raise a family on one income is due to inflation and wages not matching it, or is it due also to people living extravagant lifestyles (buying more stuff that they do not need, cable tv/satalite, all sorts of decorations, junk food, huge houses, etc). Or, perhaps, do we have both going on?

I used to believe that oil prices were driven by demand and production costs. Big oil companies posted record profits which became a political debate topic. Then the mid term elections came .... oil prices dropped. The elections over ... we're back to $3 a gallon.

I understand Katrina had an impact on prices. Why didn't it impact availability or profits? You can't explain the economics that drove prices down to almost $2 a gallon. There is no election this November. Let's see what the price of gas is ... I'm expecting $3.30 - $3.50.

It is my understanding that, although Gas prices have risen with inflation, wages have not. But seeing as how I have no quantatative data, I can not prove that assertion. My folks comment on how it used to be possible to raise a family on one persons income, but that it is no longer possible/practical because wages have not increased to match inflation. I have to wonder, though, if the inability to raise a family on one income is due to inflation and wages not matching it, or is it due also to people living extravagant lifestyles (buying more stuff that they do not need, cable tv/satalite, all sorts of decorations, junk food, huge houses, etc). Or, perhaps, do we have both going on?

In "Real Wages Fail to Match a Rise in Productivity," Steven Greenhouse and David Leonhardt reported in the August 28, 2006 edition of the New York Times that despite a very healthy increase in productivity over the past three years, real wages for American workers have dropped by two percent over the same period.

As a result, wages and salaries now make up the lowest share of the nation’s gross domestic product since the government began recording the data in 1947, while corporate profits have climbed to their highest share since the 1960’s. UBS, the investment bank, recently described the current period as “the golden era of profitability.” (Greenhouse, 2006)

According to a report by Goldman Sachs economists, "the most important contributor to higher profit margins over the past five years has been a decline in labor's share of national income."

The rich get richer and the middle class get poorer.

Income inequality is greater now than it ever has been in the past. Greater even than it was in feudal Europe. There is no disputing of this fact. Reagan-Bush have gotten exactly what they set out to achieve 30 years ago. The most disgusting thing of all is that they got the middle class to go along with it!

The rich get richer and the middle class get poorer.

Income inequality is greater now than it ever has been in the past. Greater even than it was in feudal Europe. There is no disputing of this fact. Reagan-Bush have gotten exactly what they set out to achieve 30 years ago. The most disgusting thing of all is that they got the middle class to go along with it!

You said it, Roody! The main beneficiaries of our work are those five percent of the world's population that own ninety-five percent of the world's wealth. The rest of us, the ninety-five percent of the population that work for a living, are the ones that produce all of that wealth but have the least access to it. There is nothing special about those that comprise the other five percent. They are no more intelligent, worthy or deserving than any of the rest of us. It is simply intrinsic to the capitalist system to concentrate wealth in fewer and fewer hands. Facing the Future, a Seattle based educational resource organization, describes it quite succinctly.

"As we enter the 21st century, the gap between the world’s rich and poor is widening, both within and among countries. The vast majority of the world’s population is receiving an ever-decreasing share of its collective wealth, while the share claimed by a few rich nations and individuals is steadily growing."

Mark Hudson, writing for the Progressive Librarian in 1999, adds detail to this statement. Bear in mind, as you read the following statistics, that since Hudson's 1999 analysis, this trend has not reversed or abated, but actually accelerated.

"We live in an era of unprecedented prosperity - and staggering poverty and inequality. The combined wealth of the world's 225 richest people is now over $1 trillion, which is equivalent to the yearly income of the poorest 2.5 billion people. Here in the United States, the wealthiest country in the world and indeed in all of history, the richest 1 percent of households own about 40 percent of the total wealth, the next 19 percent of households own another 45 percent, while the bottom 80 percent of households have only about 15 percent."

That the current administration was able to get the very people they are screwing to vote them back into office is testament to the power of the fear card they played just before the election.

Your theory(s) are sound. I never thought of it in those terms,seems they do apply. Folkes can say or think what they wish but most in the US have not really cut-back in gasoline use to the degree of really making any supply and demand impact. Temporary, seasonal demands have effected prices,only short-term. The "elastic" theories are yet to be proven I'm afraid. I use my car VERY little, $200 worth of gas since I moved a year ago including the 800 trip in my car to get here. A neighbor of mine runs in and out of her home 10 or so times a day. She has no family, I've only to suppose that she likes driving as she makes NO attept at being efficient. This can be said for the VAST majority of "Americans".

Looks like the cagers are gettin' nervous.

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^^^

nice

http://www.hurricanezone.net/#02a

^^that oughta be interesting, rare too

In 1976, a gallon of regular gasoline was about $0.61/gallon. A gallon of whole milk was about $0.60/gallon.

Today, both of them are about $3.00/gallon.

I think it's about time for a Senate Select Committee to investigate these ruthless capitalist dairy farmers.

Gas in the US is still amazingly cheap. It costs around twice as much in Europe. The fixed costs of car ownership are much higher for most people in the US than the variable costs of actually driving their car.

Gas in the US is still amazingly cheap. It costs around twice as much in Europe. The fixed costs of car ownership are much higher for most people in the US than the variable costs of actually driving their car.
I believe, someone correct me if I'm wrong, but the gas is the same price, the tax is different.

http://www.hurricanezone.net/#02a

^^that oughta be interesting, rare too
It's already raising crude prices, even before it hit.