The Center, founded in 1985, is an environmental organization dedicated to protecting the environment, enhancing human, animal and plant ecologies, promoting the efficient use of natural resources and expanding participation in the environmental movement.
Tuesday, December 16, 2014
Gasoline Prices Have Little Effect On Car Travel
The U.S. average retail price per gallon of regular motor gasoline has fallen 28% from its 2014 peak of $3.70 per gallon on June 23, to $2.68 per gallon on December 8. However, this price decline may not have much effect on automobile travel, and in turn, gasoline consumption. Gasoline is a relatively inelastic product, meaning changes in prices have little influence on demand.
Price elasticity measures the responsiveness of demand to changes in price. Almost all price elasticities are negative: an increase in price leads to lower demand, and vice versa. Air travel, especially for vacation, tends to be highly elastic: a 10% increase in the price of air travel leads to an even greater (more than 10%) decrease in the amount of air travel. Price changes have greater effects if the changes persist over time, as opposed to being temporary shocks.
Automobile travel in the United States is much less elastic, and its price elasticity has fallen in recent decades. The price elasticity of motor gasoline is currently estimated to be in the range of -0.02 to -0.04 in the short term, meaning it takes a 25% to 50% decrease in the price of gasoline to raise automobile travel 1%. In the mid 1990s, the price elasticity for gasoline was higher, around -0.08, meaning it only took a 12% decrease in the price of gasoline to raise automobile travel by 1%. (DOE-EIA)