Gerry Brownlee made some quite remarkable statements in parliament recently (this video is worth watching; Lockwood’s response to Julie’s point of order about halfway through was a moment of quite some mirth in my flat). To summarise Julie’s questions and Gerry’s answers (NB: I have quoted Gerry verbatim in some places, hence some of it is incoherent):
- Are the RoNs an appropriate use of money? While fuel prices “fluctuate”, supermarket’s offer fuel discount vouchers, so “it’s clearly evident then that the pump price is an extremely irrational input into the consideration of strategic transport policy.”
- Should the RoNs be reconsidered in light of stagnant traffic volumes? By alleviating congestion you will reduce time and distance spent travelling, which is very good for the environment.
- Is the risk of high petrol prices a risk to the RoNs? “There are a number of studies that suggest that the relative price of petrol to the decisions that people make about transport modes is inelastic.”
- What specific evidence suggests the RoNs are the best way to improve NZ’s economic productivity? Less congestion leads to economic benefit, and National won the last election so NZers agree.
- Does the minister expect the economic impact of borrowing for the RonS will be similar to Greece? No, because Greece spent most of their money on monolithic rail projects.
Questions numbered 1 and 3 are, I think, the most interesting, so let’s unpack what’s going on here in a little more detail.
In response to question #1, Brownlee suggests that fuel prices are an “irrational input” into the consideration of strategic transport policy because fuel prices fluctuate, and supermarkets offer fuel discount vouchers. Now, what Gerry terms “fluctuations” is more accurately described as a long term (since 1998) upwards trend in fuel prices, with various ebbs and flows along the way. Yes, the GFC was one giant ebb – but prices have since recovered and now sit at levels similar to what they were pre-GFC (which is surprising given the economic meltdown in Europe).
Quite how supermarket fuel vouchers are relevant to the debate I’m not sure. Mainly because the lower prices one person pays has to be offset (in terms of the fuel price margins) by someone else paying more (probably those schmucks like me who don’t have fuel vouchers). And I find it quite humorous that Brownlee suggests New Zealanders should avoid higher fuel prices by spending $400 per week on groceries. That level of spending may be achieved in the Brownlee household, but it certainly does not happen in mine ($50-$100 per week on groceries is all I spend).
And while fuel prices are certainly volatile, it’s a stretch to suggest they are an “irrational input” into strategic transport policy. Indeed, Brownlee will find that most of the transport models on which the business cases for the RoNs are based actually incorporate fuel prices as an input into the generalised cost functions that they use to determine mode split. Stated differently, the fuel prices that Brownlee criticises as an “irrational input into … strategic transport policy” are actually part of the highly rational equation that determining expected traffic volumes on the RoNS. Therefore to call them “irrational” would seem to be directly undermine the validity of the models on which the RoNs’ are based. That’s an own goal Brownlee …
And now question #3. Julie’s asks whether high fuel prices would be a threat to the RoNs programme. Brownlee suggests that they are not, because the demand for travel is “inelastic.” Hmm … that actually sounds somewhat informed. But before we decide that Brownlee has awoken from his transport coma let’s first review what the word “inelastic” actually means. WikiAnswers defines it as follows:
Inelastic demand is when the quantity demanded of a good doesn’t respond strongly to changes in price. The percentage change in quantity demanded is less than the percentage change in price (% change in Qd < % change in P).
This basically means that if the price of fuel were to increase by 100% then the demand for travel would reduce by less than 100%. Brownlee’s correct to observe that the elasticity of demand for vehicle travel with respect to fuel prices is less than 100%. It’s typically around -30% in the long run, which means that a 100% increase in fuel prices would on average cause a 30% reduction in demand. That definitely fits the technical definition of “inelastic”. But does this confirm that the risk of sustained high fuel prices is no reason to reconsider the RoNs?
The short answer is no, and here’s why: While travel demands are inelastic with respect to fuel prices, they are not immutable – i.e. they still reduce when fuel prices rise, as you would expect (that is after all what economists refer to as the “universal law of demand”). And as most traffic engineers will tell you a small reduction in vehicle demands can have a major impact on travel delays, because congestion is a upwards sloping non-linear function of demand.
If you’re not one to revel in obscure mathematical jargon, then the figure below may help – it shows the type of travel delay functions likely to have been used in the transport models on which the RoNs business cases were based (source). And you can see that they ramp-up quite considerably.
In this graph the x-axis is the volume (demand) to capacity ratio (v/c), while the y-axis measures vehicle delays. So if you’re up around 90% v/c (x-axis) then a reduction in demand in the order of 15% might shift you quite a long way down the curve to the left, i.e. towards less delay. The non-linear relationship between vehicle demands and delays is, incidentally, the primary reason why the roads are generally so clear during school holiday periods – because the small reduction in travel demands caused by parents not dropping their children at school results in much less congestion.
So the takeaway message is this: While travel demands are inelastic with respect to fuel prices, that is not a valid reason to suggest that the economic merits of the RoNS would not be affected by a period of sustained high fuel prices. The truth is that sustained high fuel prices would reduce travel demands sufficiently that the (already tenuous) economic benefits of the RoNs would vapourise. That’s what Julie was getting at and that is what Brownlee does not seem to understand.
At some point I hope it becomes untenable for Brownlee (or anyone else for that matter) to suggest that fuel prices do not impact on the RoNs business cases. One might even think that point is approaching relatively fast; after all we’re now halfway through 2012, state highway traffic volumes have been broadly flat this year thus far, and fuel prices have now increased quite substantially in recent weeks. Of course, I hope that fuel prices plummet tomorrow and NZ’s economic growth surges – in which case most of the RoNS might be a worthwhile investment.
But that’s not something I’d be prepared to bet $14 billion on. That’s actually what National are doing: They’ve gone out and bought a $14 billion transport lotto ticket. When you put it in those blunt terms Bill English’s cries of “prudent fiscal management” start to sound quite hollow, but that’s getting off topic …