Inelastic Demand for Gasoline

Substituting a more fuel efficient car for one less efficient is only one substitute for gasoline as prices rise. The more common substitute and better measure of elasticity is the amount of gasoline actually used. I have not seen any recent numbers but a study of drivers in the Salt Lake City area during the price shocks of the 1980s was that for every 10% increase in price, there was a corresponding 6% decrease in gasoline consumption. People drove less, consolidated trips, and found other forms of transportation. After all, they were purchasing the service gasoline provides (transportation), not just the gas.

Randy is quite correct. The immediate short-term is always milage reduction. The trouble here is the easy credit expectation of Consumers this gas bubble cycle. They are not cutting down their driving, because they have had previous higher levels of Consumer debt. Numbers also have a special effect: No one thinks seriously of paying $2.30 per gallon, but $2.50 brings them up short, thinking only four gallons per $10. lgl

Time is a factor here as well. The elasticity is surely affected by the velocity (pardon the pun) of gas price increases. If the price rises swiftly, expect increased substitution. If the increase is gradual, the elasticity curve softens (away from 1).

William

Don't limit your thinking to cars.

The price elasticity of gasoline depends not only on the elasticity of automobile fuel demand. Gasoline and its source, crude oil, are also used industrially as an energy source and starting material for all kinds of synthetic chemistry. As prices of items whose production is gasoline-intenive rise, other products substitute for them.

I just came back from visiting my folks in the UK. Gasoline is ~$6 per US gallon. People do drive small cars, which are significantly more efficient, although the hybrid thing hasn't caught on big yet.

Yet since visiting over the last ten years traffic has increased significantly, as well as the number of 2 car families as both parents in a family work and have to drive to different places. This is especially true now. Jobs are not for ever, and people change jobs far more often, and need to live somewhere between where both partners work.

So I think there is a limit to reducing travel - you still have to get to work, and a co-worker may not be nearby to carpool with. Public transport is great in dense population areas, but less so outside of them, to the point where if your outside the city, you have to drive.