You can scarcely pick up a paper or turn on the television these days without hearing the word recession. Leading economic indicators have wiggled in different directions over the past few months, but the general trend appears to be negative. The conventional wisdom points toward an economic downturn of some kind during 2008, and businesses in all sorts of consumer markets are bracing for the inevitable tightening of purse strings.
A funny thing happened on the way toward economic slowdown, however. As one might expect, oil prices dropped on expectations of reduced future demand. As one may not have expected, the drop was puny, from just under $100 per barrel to just over $90 per barrel. Oil prices, it seems, are having a tougher time moving down than ever before.
Since 2003, real gasoline prices have doubled, from about $1.50 per gallon to around $3.00. That’s a substantial increase; for most products out there, we’d expect a doubling of real prices in four years to generate substantial declines in consumer purchases. Not so for gasoline, which is what economists call an inelastic good — a product for which big changes in price lead to small changes in demand. Something, in other words, that you need badly, like water, or insulin. Something you can’t not use.
The Congressional Budget Office recently released a study (PDF) examining gasoline price increases and their effects on consumer behavior. The CBO report notes that in the short run, a 10 percent increase in gas prices leads to just a 0.6 percent drop in consumption. If that same price increase were sustained for 15 years, the drop in consumption would rise to 4 percent, a larger but still disproportionate adjustment. The report goes on to note that consumers have gotten substantially less sensitive to gas price increases over time. Why?
That decline in sensitivity has been attributed to growth in real income, which has rendered gasoline a smaller share of consumers’ purchases from disposable income. Price sensitivity also has declined because a gallon of gas takes a car farther than it did in the past, in part because of fuel economy standards. Finally, the development of distant suburbs also has contributed by making some consumers more reliant on the automobile.
So income growth is important, although it’s still the case that current increases in gas prices force consumers to shift spending away from other purchases and toward gasoline, making them feel less rich (because they are, in fact, less rich).
Efficiency and land-use patterns are the other forces shaping consumer dependency on gasoline. So what happens now when prices double? According to the CBO, which studied recent price effects in California, drivers drive a little slower. They take slightly fewer freeway trips, and where transit is an option, a 50-cent increase in gas prices reduces freeway trips by 0.7 percent and boosts transit ridership by roughly the same amount. They purchase different cars. For the first time in ages, light-truck sales began to decline in 2004, a trend that has increased the average fuel efficiency of new cars.
As a result, total national gasoline consumption has slowed considerably in recent years and has — remarkably — fallen in a number of recent quarters. Falling gasoline consumption has generated small drops in emissions, so while those high prices have proven painful for some consumers, they are demonstrating that increasing fuel costs can slow or stop emissions growth (and can do it less painfully if taxes are used, such that revenue can be plowed back into uses that benefit taxpayers in other ways).
A few things haven’t declined at all in response to prices, however. Recent census data has made it clear, as I pointed out last week, that migration from denser northern states to low-density southern and western states continues. That continuing migration means that there’s been no reduction in national vehicle miles traveled. Crucially, the CBO study shows that gas prices do reduce VMT where transit is an option, but have no effect on VMT where it is not. In the vast majority of rapidly growing cities and towns, transit is not readily available.
This is a significant point. Costly gas has nothing on home prices as a force for household migration. Congestion can encourage inward movement — toward center cities — among the wealthiest households, for which time is most valuable, but for most other families, time spent waiting in traffic, idling, burning gas, is nothing compared to the benefit of a super-cheap home 40 miles from work. Consumers adjust to short-term prices where they can, mainly by purchasing smaller, slightly more efficient cars, but big lifestyle changes just aren’t in the cards.
That’s kind of a scary thought. It suggests, for one, that any future backsliding on oil prices might quickly undo progress made on efficiency and gasoline consumption. It suggests, for another, that if prices do remain high and fuel-efficient cars continue to erode the connection between travel and gas prices, then consumers will have no compunction about spending ever more time on roads, living farther from their jobs in bigger houses, consuming a lot of whatever replacement automobile energy source we decide upon — electricity or alternative fuel. It also means that congestion is going to get much, much worse.
So we have a bit of a problem. Without changes in the way we build our cities, we can expect continued increases in the number of automobiles on the road and the number of miles those vehicles travel. This is going to pose a challenge for any effort to curb emissions; even wholesale shifts in the vehicle fleet toward electric or biofuel automobiles will place significant demands on the power grid or biofuel infrastructure — which may well overlap with inputs for food production. Both sources of alternative automobile power are under stress. Electricity demand — and prices — are increasing across the country, and the push to halt new coal capacity (which is desirable) is only going to constrain supply further.
It’s good to know that emission reductions for the nation’s vehicle fleet are possible, despite our heavy dependence on cars and our declining sensitivity to gas prices. At some point, we really have to ask if the best way to address our energy and environmental issues is to take as given ever more sprawling metropolitan areas involving ever longer commutes dependent entirely on automobiles. Yes, efficiency gains are available in such a world, but the less dense our cities, the costlier those gains will be. And all the efficiency in the world won’t eliminate congestion growth, hours and energy wasted sitting in traffic, and the personal and environmental cost of having to get in a car — however powered — to get anywhere.