Gas Prices Have Little Effect on Demand for Car Travel

Automobile travel increases by just one percent for every 25% or more decrease in gas price.

December 17, 2014

WASHINGTON – 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 last Monday, December 8. However, this price decline may not have much effect on automobile travel, and in turn, gasoline consumption, says this week’s report from the U.S. Energy Information Administration (EIA).

According to the report, gasoline is a relatively inelastic product, meaning changes in price have little influence on demand. Generally-speaking, it takes a 25% to 50% decrease in the price of gasoline to raise automobile travel by 1%.(In the mid 1990s, the price elasticity for gasoline was higher, meaning it only took a 12% decrease in the price of gasoline to raise automobile travel by 1%.)

Based on this, the EIA's Short-Term Energy Outlook (STEO) for December expects that gasoline prices in 2015 will be 23% lower than the 2014 average, and consumption in December will be virtually unchanged from year-earlier levels, as increased fuel economy balances out increases in vehicle miles traveled in response to lower prices and other factors.
EIA also offers some possible explanations for the decline in gasoline price elasticity in recent decades include the following:

  • The slowing of per-capita vehicle miles traveled (VMT). After increasing for decades, VMT per capita slowed in the late 1990s and even declined in recent years.
  • The retirement of the baby boomer generation, because retirees tend to drive less than the working-age population.
  • Population migrations to urban area, as opposed to rural and suburban areas, because urban residents typically drive less.
  • Declines in licensing rates for teenagers, as young people delay or avoid getting their drivers' permits and licenses.
  • The reduced share of household income devoted to motor gasoline expenses. As gasoline represents a smaller share of household expenditures, drivers may be less sensitive to fluctuations in price.

For more info on how changing driver demographics affect the fuels industry, keep an eye out for the upcoming Fuels Institute report, "Driver Demographics: The American Population’s Effect on Vehicle Travel and Fuel Demand” in January, or read an excerpt from the report in the December issue of NACS Magazine.

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