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.
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.