How do Consumers Respond to Falling Gasoline Prices?

Last month, as gas prices dropped by nearly 15 cents nationwide, consumers responded by purchasing less fuel-efficient vehicles. This trend became evident with the help of two measures. First, sales-weighted new vehicle fuel economy dropped noticeably after several months of impressive gains. According to data collected by Michal Svitak and Brendan Scoette at the University of Michigan’s Transportation Research Institute, the average fuel economy of a vehicle purchased last month was 0.5 miles per gallon less fuel efficient than those purchased in August… a ten percent decrease when compared to last month’s level relative to when measurement began in October 2007.

Similarly, following four months of record-setting electric vehicle sales, last month’s sales figures were nearly 25 percent below August’s record sales. There were a few factors that contributed to last month’s sales drop, with some models becoming less commonly available as automakers work on their sales strategies. Aside from that, gas prices appear to be the likely culprit. In terms of national average, last month’s retail gasoline prices were only 8 cents lower than August of this year—moving from $3.48 to $3.40. However, gas prices vary widely from state to state due to a variety of factors, ranging from proximity to refineries and other transportation logistics, to state taxes. There are reports that prices in some states dipped below $3.00 per gallon, which represents a psychological threshold for many consumers. From a dollars-and-cents perspective, are consumers rational when they allow fluctuations in gas prices to influence vehicle purchase decisions? When we compare sales-weighted new vehicle fuel economy with gasoline prices, it’s possible to calculate the “cost per mile” of new vehicles, based on that month’s gas prices. The trend has remained mostly flat, and is driven more by gas prices than incremental improvements in fuel economy.

On a fuel cost-per-mile basis, consumers are definitely benefitting from the improved standards. Cost per mile has fallen by 2 cents since 2008. There are even greater gains in alternative fuel vehicles, with the Nissan Leaf and Tesla Model S requiring a fraction of the per-mile cost to operate.

How much do gas prices influence consumer preferences for alternative fuel vehicles? The two charts below illustrate month-over-month percentage changes in electric vehicles, as well as sales-weighted vehicle fuel economy. These charts should not be interpreted as an apples-to-apples comparison. The first chart, looking at electric vehicle sales, compares fluctuations in gas prices to changes in the aggregate number of electric vehicles sold that month. The chart underneath it compares fluctuations in gas prices to the average fuel economy of new vehicles purchased that month, so in interprets a characteristic of the vehicles sold, rather than the volume of a certain type of vehicle sold. However, despite the fact that the sales data is very different, both data sets follow remarkably similar trends, rising and falling in basically the same patterns. It’s possible that gas prices are the force driving consumer behavior in both cases.