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High fuel prices mean we are travelling less

OK, I admit I haven’t come up with the catchiest title for this post, but it’s a good TL;DR. As I’ve written previously, world oil prices were pretty dang low for 20-odd years: from the mid-80s to the mid-2000s. The price of a litre of petrol in New Zealand reached its lowest point in 1999, and started to rise from then on – with major rises in the last decade.

Petrol Consumption Trends

Our consumption of petrol grew and grew, until 2004. Since then, it’s been going in the downward direction, and more so since the 2008 recession began. Other bloggers have written about related issues such as the decline in drivers’ licenses being issued, less distance being travelled, and lower vehicle ownership.

The trends weren’t confined to New Zealand, either. Kent has written about declining travel in the US, and in fact there have been declines, or at least less growth, throughout the OECD. And it all started happening around 2003-2005.

Various explanations have been floated for this. Could it have been the millenials, too busy spending time on Facebook and smartphones to drive? Was it the recession? Perhaps online shopping?

Personally, I don’t think it’s a coincidence that vehicle travel and fuel consumption started to decline all around the OECD, at around the same time, just as oil prices started to go up dramatically. I consider these higher prices to be the main factor in reduced driving – certainly up until recession hit in 2008. Higher prices were the main kicker which may have started other shifts, e.g. young people becoming less likely to get a license.

Furthermore, fuel prices are likely to stay high, and in fact to increase over time. You would hope that governments would take this into account when determining its transport policy – although ours doesn’t seem very interested in doing so.

Some countries have reported more of a decline in driving amongst young people, and I don’t think this is a coincidence either. Young people would have been particularly hard hit by high prices – their lower incomes mean they had to cut back more, and their travel was often discretionary. Let’s say you are young enough to live at your parents, and you get $20 a week to do whatever you like with. Well, that $20 buys half as much petrol as it would have ten years ago. You can blow your entire pocket money just in getting to a few friends’ houses. It’s no wonder that fewer people are getting licenses. Another factor is that, post-2008, many countries are struggling with high youth unemployment.

Elasticity

In 2007, the excellently named Booz Allen & Hamilton did some research on just how much fuel prices affect travel. They estimated the short run elasticity of petrol consumption at -0.15, or -0.2 in the medium term. Elasticity is a commonly used concept in economics, and you can check out the Wikipedia page for more info – but in brief, an elasticity of -0.2 means that a 10% increase in the price of petrol is associated with a 2% decrease in petrol consumption. If something goes up in price, we buy less of it, right? Petrol is one of those things that we’re not very price sensitive to – the demand is “inelastic” – but it’s naive to think that higher prices don’t have an effect.

And, over the last decade, the increases in petrol prices have been massive. In real terms, they’ve gone from $1.27 in June 2003 to above $2.04 in June 2013. That’s a rise of 60%. In nominal terms, the increase is even larger. And if you look back to June 1999, when prices bottomed out, there’s been a real increase of 80% since then.

Holding other things constant – i.e. forgetting about economic growth, population growth and so on – the numbers from Booz Allen & Hamilton suggest that per-household petrol consumption would have fallen by 12% since 2004. That’s not too different from what we’ve actually seen.

Notwithstanding that elasticity estimates can be a lot less accurate when you get such large percentage changes, we’re certainly talking the right order of magnitude. I think a regression analysis would be likely to show that the main factor in decreased petrol use and driving is, indeed, higher prices.

Taking It Further

I want to point out that a lot of the non-academic debate on changing travel trends has focussed on things other than prices. In fact, even some of the ‘academic’ stuff seems to have ignored prices – see the paper here, although that only presents arguments rather than any kind of quantitative analysis. As an economist, I’m quite stunned by this. Transport fuels are a major part of household budgets (more than $2,300 a year on average), and prices have risen massively in the last ten years, and people don’t think that’s had an impact on the way we get around? I know I drive differently than I would if petrol was still $1.20 a litre. My daily patterns mightn’t change much, but I’d probably go on more road trips, more spontaneous drives in the weekend and so on. I’ll be looking at this more in the future.

19 comments to High fuel prices mean we are travelling less

  • On elasticity in consumption of what could be called a mostly unavoidable expense like petrol in a highly auto-dependent city like Auckland, the generally accepted view is that it is very low in the short term but grows with time. For example it takes a long time to move to somewhere less reliant of driving to get to work, study, friends, and play, but that people do do it. But if petrol takes another upward repricing (a shock to those not expecting it) most will have little choice but to fill up at the new price, but it will almost certainly stimulate another round of lifestyle changes in part focused around freedom from this unavoidable expense.

    The recent, worldwide urbanisation is part of this reaction. Both trends will continue; driving to continue to flatline or drop and urbanisation to increase. Welcome to the new century: the urban age.

    • John Polkinghorne

      Yup, and going along with that – the elasticities increase when people have better alternatives to driving, including public transport. In NZ, we’ve struggled with a lack of alternatives. This is starting to change.

  • SF Lauren

    The thing is however, if you look at traffic volumes they have been increasing across the board (excluding areas already well over capacity) and so it seems that rather than driving less we are traveling shorter distances.

    And so on that note, why are some people insisting on using their cars for short trips in the range. Such as 17% being under 2km and 50% under 6km.

    If I think back to the 80s and 90s we got huge amounts of milage in our family car, however any short trips we did were on foot or by bike and it was frowned apon to take the car to the local shops.

    • John Polkinghorne

      I don’t think traffic volumes have been increasing across the board – certainly that isn’t the case for state highways (we’ve put that graph from the NZTA’s State Highway Traffic Data Booklet up a number of times). The data for local roads is obviously a bit sketchier, but I’d be very surprised if you could point to any evidence of traffic volumes increasing “across the board” for those either. Not for NZ as a whole, and probably not for Auckland either.

      I don’t really see a distinction between “driving less” and “traveling shorter distances” – certainly I don’t see how a reduction in VKT is not evidence of “driving less”.

      It’s probably fair to say that local trips have been less affected than long-distance trips – Booz Allen & Hamilton touch on that, saying that elasticity tends to be higher for those long trips – and of course domestic air travel has also become more competitive with driving. I’ll explore that in a future post, although someone would really need to do an econometric analysis to see how much effect that has had on VKT.

      • SF Lauren

        From the traffic volumes I have seen posted here the only ones that get shown are the harbour bridge or some inner city motorway/road thats been at capacity for the past 10-20 years whilst being given PT alternatives.

        If you look at roads that arent at capacity and can handle growth they are doing just that, growing. Take the upper harbour highway for instance, thats been happily growing away for the past few years.

        In terms of VKT it is just that, distance traveled. It is not a measure of time spent traveling or a representation of the percentage of trips being done via car.

        As I’ve pointed out before, one return flight to wellington can reduce someones annual millage by 20% if they do that rather than driving..

        • John Polkinghorne

          SF, we’ve posted the graph a number of times, and it’s a pretty clear indicator as far as I’m concerned. For your reference: see the graph labelled “State Highway Traffic Volume Indexed Growth”, available here: http://www.nzta.govt.nz/resources/state-highway-traffic-volumes/docs/SHTV-2008-2012.pdf.
          Upper Harbour Highway is hardly a typical road. It’s located near major greenfields growth nodes (Albany, Rosedale), and at the end of the brand new Upper Harbour Motorway, which itself runs along major growth areas including Hobsonville and, to a lesser extent, Greenhithe. That is not “across the board”. I’m sure traffic volumes are also on the up around Westgate, but these roads in rapidly growing parts of the city are not representative of the “average” NZ road.

          • SF Lauren

            Have to agree actually, although a few have gone up others have gone down meaning in aggregate things have been rather stready.

            It would be interesting to know how the volumes have been changing between centres so you could see how different areas are being effected.

    • Max

      The fact that I get honked at crossing a side road – even though I started crossing before the SUV driver started turning – might have something to do with that.

      • SF Lauren

        The other day when I was crossing a zebra crossing a driver about 3 cars back started honking their horn seemingly disgruntled that the car at the front was giving way to a pedestrain as legaly required. I could only assume the person must have thought they were rather high up in society.

    • Good point SFL. It would make a huge difference to traffic volumes in Auckland if we could get a lot of those 17% of short trips made by bicycle and it would be a lot cheaper than providing for more cars.

      In the Netherlands about 70% of cycle trips are less than 7kms so short trips are definitely where the growth should happen in cycling. I dont think we will get many people cycling 10kms to work but we will get them cycling 3kms to the train/ferry/busway station or to school.

      Greenways and bike boulevards are the cheapest alternatives and are starting to happen all over Auckland.

  • Waspman

    A lot of tax, be it GST or excise taxes have been added to pump prices in the last 5 years and we have two x 3 cent installments to go not to mention hikes Road User Charges, (remember the tax cut promises in 2008 by National?). Fuel efficient cars and motorcycles, more use of PT and alternatives hurt the revenue take.

  • Jacques

    This whole idea of elasticity or inelasticity depends on the time scale that you’re talking about I reckon, with a continuous rise in the price of petrol that we’re having, people are indeed being affected but it’s a slow and continuous process – a quick spike or trough in the price of petrol won’t change how much driving people do but the speed at which petrol price rises over the coming years will probably influence the speed at which people start looking at alternatives.

  • Anthony McBride

    As a 20 year old, I am intensely reluctant to make progress with my learner’s license…The huge increase petrol prices in the past few years and the large amount of adverts regarding dangerous driving had made me and many others look for other options. However, I am in South Canterbury, so the options here, outside of Timaru is very limited.

    When I was at school the amount of students who used cars to get to school has dropped over the years,while bus use has increased to the point where I was forced to sit of the floor of the school bus aisle with a few others. Not a comfortable journey.

  • JohnP

    Petrol costs more than a decade ago but it is still a very cheap commodity. Despite needing to be extracted from the ground and refined and transported half the globe it still costs less per litre than milk out of a cow in Pukekohe. You are probably safe in saying that the price will rise in the future but nobody has a clue by how much and we have seen in the past how the price can fall quickly when peace breaks out in the world. Most articles suggest that the price elasticity of demand is inelastic in the short run but elastic in the long run as people are able to change their needs through travelling less and buying more efficient cars. But that doesn’t take into account the social cost of travelling less, the not going to see your mum, not going to a show, not taking the kids on trips and all other travel forgo when the bus is your only option. A price rise not only results in substitution but also has a wealth effect as we miss out on the utility of discretionary travel and miss out on other things to be able to afford petrol.

    • SF Lauren

      Back when I first started driving in 1998 petrol was under 90c a litre for 91. 15 years later its gone up by 140% with roughly half of that being new tax.

      Meanwhile house prices have gone up by about 200%, TVs are abouy 4 times the size and international air tavel has remained about the same with the average salary going up by about 50%.

    • John Polkinghorne

      Good point on the wealth effect… I’m not sure how relevant a comparison milk is, though, unless someone’s thought of a way to power cars with it and hasn’t told me!

  • On predictions of future crude price movements the question those that argue new supply will lead to price reductions need to answer is why have these not occurred already, new supply in a depressed economic environment should have lowered the price, yet at best all that it has achieved is to flatten price growth. This fact points to new floors under price: new supply is in fact very small in total, global supply is stuck on a slightly rising plateau since around 2005, and demand is still creeping up, especially from China and India and the oil exporting nations themselves. Throw in the third factor; the extremely high cost of production of all this new supply [ultra deep water, bitumen, fracking] and you have the reason why, I believe, the expectation should be on the next re-pricing of this essential commodity being up again.

    In other words, don’t believe the hype out of the industry in the US, and don’t be ‘Shocked’ if the price rises significantly over the next couple of years.

    Two side issues.
    Unrest in oil producing countries. Currently Libya is all but off-line, Nigeria affected, Iran suffering sanctions, and yes these problems could all be sorted some time, yet there has never been a period when production somewhere hasn’t been affected by these kinds of ‘above ground’ factors so it is reasonable to assume that perfect available rate of production will never be attained everywhere at once, so I don’t see the current disturbances as special.
    Apparent manipulation of price. An old chestnut. Oil is one of the world’s most traded commodities and is not an easy product to control, by either the Saudis, the US, or the Russians, let alone various unnamed cartels or the Oil Majors. While there is all sorts of gaming around short term price movements it is just not credible to claim that in general terms this market doesn’t function with sufficient efficiency to reflect the general supply demand balance.

    While I agree with JP that oil is still cheap in terms of the work it does, crude has, in nominal USD terms, quadrupled in price this century to stubbornly stay well above its historic norm and that this has impacted many in western economies. And that this must reflect major underlying supply/demand issues.

    I repeat: Don’t be Shocked.

    And beware of that word. It is used to imply that no-one could possibly have been expected to expect such an event. It’s BS.

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