Sep
17

Understanding Inelasticity of Transportation Demand

 
Last week, the Bureau of Labor Statistics released its latest numbers on consumer spending for 2013. Drawing from the updated figures, we did a write-up of the burden of gas prices on American households, particularly its lowest earners. Overall, 5 percent of U.S. household spending is dedicated to gasoline, with that figure approaching 12 percent for the lowest-earning quintile. However, it seemed worthwhile to examine if there was evidence within the Consumer Expenditure Survey to see if one of the most common assumptions about the impact of gas prices on the economy is true: do gas prices have a noticeable impact on discretionary spending? Or in other words, when gas prices increase, does spending on other discretionary items fall accordingly? After all, gasoline demand is understood by economists to be highly inelastic, despite its relatively volatile price compared to other basic necessities. Research from the University of California at Davis summarized the recent research, stating, “The literature shows increasingly inelastic demand for gasoline with respect to price in both the short and long run and recent studies have shown that short-run price elasticity of demand has decreased in absolute value by up to an order of magnitude in the past decade, meaning that consumers have become significantly less responsive to changes in gasoline price.” The reason that gasoline demand is relatively inelastic is intuitive. Outside of certain parameters, most of people’s driving is essential: They are commuting to and from work, getting their kids from school, running errands, etc. Economists report that consumers respond to high gas prices in two ways—first, by either driving less (which, as just mentioned, will only get you so far), or second, by driving more fuel efficient vehicles. While this might change the demand outlook in the longer term, most people don’t run to the car dealership to buy a Prius as soon as they see gas prices climb. When an oil crisis hits, the nation must cope with the automotive fleet it has, not the one it wants. So when gas prices rise, it is often reported that consumers must cut back on their discretionary spending, on things like clothes, restaurants, and entertainment. Arguably, this impact is clear enough that it can be seen in BLS’s data. The data is somewhat blunt, providing national and annual averages. However, compiling spending on clothes, restaurants, and entertainment shows that in the past decade it has typically moved in the opposite direction as gasoline spending—reinforcing the idea that high gas costs have cut into these sectors.

In 2002, 2003, 2004, 2006, 2007, 2010, and 2011, changes in spending (as a portion of total expenditures) moved in opposite directions for gasoline versus discretionary spending. In 2002, spending on gasoline fell, and spending on discretionary items rose. In the other years, households spent more on gasoline and cut back on clothes, restaurants, and entertainment. In 2009 and 2009, spending on both gasoline and discretionary goods moved in the same direction, but of course, some abnormalities can be expected during the recession. 2005 and 2009 did not follow the general trend, with spending on both categories moving in the same direction, and in 2013 spending on both remained relatively flat. The fact that discretionary spending and gasoline spending has moved in opposite direction is also evident in the following chart. Discretionary spending as a percentage of total expenditures has fallen by roughly two percent, while gasoline spending has increased by about the same.

Furthermore, in absolute terms (rather than relative, as a percentage of total spending) we can see that household spending on gasoline has nearly doubled since 2001, while the other criteria have remained flat or declined. Keep in mind, this chart does not account for increases in income and expenditures during the past decade, so while the amount of money spent on things like entertainment may have remained relatively flat in numeric terms, they have actually fallen as a percentage of total spending. That is not to say that correlation equals causation. These charts are a rough analysis based on national averages. Furthermore, only three categories of “discretionary” spending are included, and it’s hard to tell what other choices American families have made due to the increase in gas prices in recent years. For example, they may have chosen to move closer to their jobs to shorten their commute, or given up a certain number of weekend road trips. Needless to say, the increase in burden from 2-3 percent of total spending to over 5 percent is disheartening.


Sep
15

Oil’s Role in the Scottish Independence Movement

 

Control of resources is often central to the question of national sovereignty. Oil, composing around 40 percent of global energy demand, lies at the heart of many a peoples’ struggle for independence—look no further than the Kurdish Autonomous Region, South Sudan, or Libya for evidence of its power in geopolitics. But while oil is well understood to be a matter ...

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Sep
12

Research Roundup: EV Reports from EEI and UBS

 

Two new research papers released in recent weeks shed light on the real potential of electric vehicles to upend traditional energy systems as we currently know them. The first report, from Edison Electric Institute, lays out an unambiguous business case for why the power sector needs vehicle electrification to take off and should take various aggressive measures to help expedite their ...

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Sep
12

Latin America, Heavy Crude, and Resource Nationalism

 

Mexico nationalized its oil industry in 1938, expropriating foreign assets and forming a decisive monopoly around exploration, production, refining, and distribution. In 1975, Venezuela did the same thing while retaining the right to form contracts with foreign companies. As usual, these state-owned enterprises, Pemex (Petroleos Mexicanos) and PDVSA (Petroleos de Venezuela) are subject to overstaffing, underinvestment, political interference, and institutionalized ...

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Sep
10

Americans Remain Burdened by Gasoline Spending

 

The Bureau of Labor Statistics has released the 2013 Consumer Expenditure Survey, an important resource which sheds important light on the burden of gasoline prices on American consumers. There is some good news. Oil spending—as percentage of GDP, as a percentage of household income, and in absolute terms for households and businesses—hasn’t continued its astronomical rise. Domestic oil production enabled oil ...

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