The Grip of Gas (reposted)

The Grip of Gas
Why you'll pay through the nose to keep driving.
By Austan Goolsbee
Posted Tuesday, Sept. 27, 2005, at 9:54 AM PT

President Bush called on Americans to drive less yesterday
in response to the "disruption"
caused by the Gulf of Mexico hurricanes. Will they? High fuel prices
make the question a natural one. Conservation advocates, along with
policy-makers and the press, have been grasping for evidence that the
answer is yes. Here's what they've collected so far: Toyota's
announcement that Hurricane Katrina boosted demand for hybrids, the D.C.
Metro's strong ridership last month, and a report of large SUVs sitting
unsold on a car lot in Texas. Unfortunately, the economics suggests a
pretty clear answer to what this adds up to: not much.

In repeated studies of consumer purchases over the years in the
developed world, drivers in the United States consistently rank as the
least sensitive to changes in gas prices. Even when gas gets expensive,
we just keep on truckin'. The latest estimates, based on a comprehensive
study released in 2002, predict that if prices rose from $3 per gallon
to $4 per gallon and stayed there for a year (far greater and longer
than the impact of Katrina), purchases of gasoline in the United States
would fall only about 5 percent.

Why don't we ratchet down more when fuel prices go up? The rule of thumb
in economics is that people react to price increases only when they can
turn to substitutes. Raise the price of Ford trucks and sales go way
down because you can buy your truck from Chrysler or GM or Toyota
instead. Raise the price of gasoline and what are the alternatives? As a
New York Times article pointed out
on
Sunday, people can't change the type of fuel they put in their cars, and
they can't stop going to work. They might take one less driving vacation
or check their tire pressure more often when they fill up. But that
hardly makes a dent in the total numbers.

Gasoline purchases are, in fact, the kind of buying affected least by
price changes because they are so closely tied up with other things we
already own. When you buy a $1,000 digital camcorder that uses a
specific brand of tape, you lock yourself in. If the cartridges get
expensive, you have to eat the increased cost until you buy a new
camcorder. Gasoline follows the same pattern. In the last two decades
when gasoline was cheap, Americans switched from cars to minivans and
SUVs, seriously reducing their gas mileage. Also, many moved farther
from their places of work=C2=AD, to suburbs and then ex-urbs. In the =
1990s,
the average commute time rose about 15 percent, and the share of people
commuting alone rose dramatically to more than three out of every four
American workers, according to the 2000 census. As jobs moved out of
central cities and into suburbs, car-pooling became more difficult and
public transportation often unavailable. Less than 5 percent of the
population regularly uses public transportation to get to work now (and
even that number includes people taking taxis). In Europe and Japan,
people drive less when the cost of gas goes up because they still can.
On average, they live closer to their jobs. About 20 percent of
Europeans walk or ride their bike to work (more than five times the
share in the United States).

Practically speaking, the only hope of changing America's driving habits
is a hefty price increase that lasts. For, oh, five years. The data show
that after that long, even the response of American drivers to higher
prices can be pretty sizable. Five years gives people the time to come
up with substitutes. Higher commuting costs over that many years could
induce you to buy a smaller car, move closer to work, find a car pool
for your kids. Of course, that's why Hurricane Katrina is not likely to
have a lasting impact on gasoline use. It's a big blip, but only a
transitory one. Which means it's exactly what consumers don't change
their behavior for.

Think about the choice between the hybrid and gasoline versions of the
Toyota Highlander SUV. At the moment, the hybrid costs about $9,000
more. Optimistically it could double your gas mileage from 17 to 34
miles per gallon (if you only drove in the city, say). A family driving
the average of 12,000 miles per year would use about 29 fewer gallons
per month with the hybrid. Even if the hurricane drove the price of gas
to $5 a gallon for three months, the hybrid would only save them about
$441 total over that time. The savings just don't add up in the short or
medium run. For the average family to justify the hybrid at its current
price based on fuel savings, gas prices would have to stay at $5 per
gallon for several years. Or, if prices stay where they are, the savings
would eventually add up if you kept driving your hybrid for a few
decades.

With time horizons like this, it's no wonder that few people change
their behavior when gas prices spike temporarily. Even the oil crisis of
1979, the biggest ever, did not have much lasting impact on America's
intensive use of energy. Within five years, prices had fallen
dramatically and people took off their Jimmy Carter cardigans and went
back to their energy-happy ways. One of the oldest lessons economists
have for thinking about what changes consumer demand is that moral
exhortation doesn't change people's behavior. Prices do. Except that for
a commodity like gasoline, even prices don't do an impressive job.

Austan Goolsbee is an economics professor at the University of Chicago
Graduate School of Business and a senior research fellow at the American
Bar Foundation.