Tuesday, July 08, 2008

Gasoline Prices Go Up, Demand Goes Down

I have argued in the past that the best way to decrease oil usage and carbon dioxide emissions is to increase gasoline taxes rather than mandate efficiencies of cars through CAFE standards. For a while it appeared that I was wrong, as prices went from $1 to $3 a gallon with hardly any changes in the way Americans drive or consume oil. But now that gasoline has hit $4 a gallon, 94% of US consumers have made lifestyle changes due to higher gasoline prices and US and major changes are being seen.

Ms. Cischke sums it up well:

What Congress didn’t or couldn’t do, the free market is now doing in the form of higher gas prices: forcing Americans into more fuel-efficient cars. Ms. Cischke of Ford says that in the last two months, “We have seen more of a shift in the market than in 20 years of CAFE. People are buying what they need.”
The impact of this can be seen in the 5 year cost of ownership of various vehicles with $4 gasoline:
While the F-250 costs $100,000 and a fully loaded F-150 — the better-known, smaller Ford pickup — costs about $70,000, a Ford Focus still costs less than $40,000 over five years. A Honda Civic Hybrid does, too. A Toyota Prius costs only a little more. A Subaru Outback station wagon runs $50,000 or so.
Another analysis compared the cost of ownership of a Prius against the non-hybrid versions of Honda Accord and Civic, with the Prius coming out on top.

Around 11% of drivers are spending at least $100 to fill the tank, leading many to the breaking point and causing some unlikely side effects:
But people who try to pump $100 worth of gas often find that they cannot, since most pumps that take credit cards shut off at $75 to prevent someone with insufficient funds or a stolen credit card from running off with gas. In addition, some older pumps still are not capable of registering triple-digit bills.
The sales of large vehicles are being hammered. Sales of Ford's F-Series pickup truck, which gets about 15 miles a gallon, are down 41 percent from June 2007. Long America’s best selling vehicle, it is outranked now by the Corolla and Camry from Toyota and the Civic and Accord from Honda. At Chrysler, sales of big S.U.V.’s have plunged 22 percent this year. There was a 62% fall in sales of Hummers in May and GM is considering selling the brand to another company. At the peak in 2002, G.M. sold 600,000 full-size S.U.V.’s, but they’re on pace this year to sell less than 250,000 of them. G.M. will cease production at four North American assembly plants that make S.U.V.’s and pickups by 2010. Light duty vehicle sales dropped 18.2% by volume in June 2008.

Meanwhile sales of high mileage cars are going gangbusters. Toyota sold 64,000 Priuses through April, a 23 percent increase over 2007 and ranking it as the ninth-best-selling car in the United States. They are selling so many that they can't make enough batteries to keep up with demand. Cars.com reported the Prius jumped into first place in May as the most-searched vehicle on the site. Dealers are reporting Prius, Highlander hybrid and Camry hybrid models from Toyota Canada Inc. are all but impossible to get and Civic hybrid models from Honda Canada Inc. are in severely short supply. Many commuters have also shifted to motorcycles and scooters.

High oil prices have also impacted the airline industry. Fuel prices have increased 84 percent this year increasing fuel's percentage of an airline ticket's price from 15 to 40%. Airlines are expected to spend $61.2 billion this year on jet fuel, more than 5 times what they spent in 2002.

This increase in fuel costs is causing airlines to raise prices 17% this year and as much as 40% in the next four years. The increased price is reducing the number of fliers by 2.7 million this summer and the number of flights by 10%, and causing more than 200 aircraft to be parked. It is also causing the industry to increase fuel efficiency in any way they can including: power-washing jet engines more often to get rid of grime, carrying less water for the bathroom faucets and toilets, and replacing passenger seats with lighter models.

Beyond changing car preferences and reduced air travel, high oil prices has had some other impacts. Some people are switching jobs for shorter commutes. The rising cost of energy is now a primary factor pushing home prices down in the suburbs, particularly in the outer rings. Travelers are shifting to rail as cost of fuel rises. UPS notes that shippers are shifting to ground shipments from air cargo. High diesel prices are also taking a toll on truckers, and some shipping is shifting to rail. And most alarmingly teenagers’ cruising has declined.

The net result of this is that US oil consumption has fallen back to 2002 levels.

And finally, one silver lining to high oil prices:
Rising gas prices and smaller belt sizes go together, according to Charles Courtemanche of Washington University in St. Louis. His research found that, for every dollar increase in the average real price of gas, overweight and obesity levels in the United States would decline by 16 percent after seven years. His study also attributes the outward expansion of American waistlines between 1979 and 2004 in part to falling prices.


JeremyGood said...

Two things:
1) The lowering levels of obesity because of gas prices are related to two factors: more walking and biking, and also the impact of gas prices on food prices: smaller portions are everywhere in restaurants. That is definitely a good thing.
2) This chart at carectomy.com shows decline in driving by region in the U.S. from April '07 to April '08. In the West alone, motorists drove 1.5 BILLION fewer miles. Not sure what's going on in New England though.

Fat Knowledge said...

Interesting chart. I wonder what is going on with New England. Strange that they have actually increased.

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