Friday, May 23, 2008

High gas prices and consumer demand

There have been many articles recently about how high gas prices are changing consumer behavior. Some articles note that in some areas gasoline consumption is down (as is the case in California), others note the decline in Vehicle Miles Traveled from last year. Still others claim that everyone is rushing to trade in large cars for small cars and hybrids, a claim that is partially true at best.

Getting back to the VMT claims, there are a couple of things to think about. The first thing is what activities are not happening because of the decline in VMT? Even though transit agencies are claiming up to about a 10% rise in transit boardings, that is still less that 0.5% of all trips (I don't have the details to break down VMT and trips, but unless it is long distance commuters who gave up driving there still should be noticeably less activities.). Commuting has inelastic demand, so the reductions must be in discretionary travel, yet retail sales were stable (not to mention all those people driving their SUVs from dealer to dealer to buy hybrids!). There is some anecdotal support to the idea that people are substituting cheaper goods for what they used to buy, but is that the case with driving? Could it be that people are buying the same amount of stuff except that it is cheaper and closer to home? That seems unlikely.

At this point with expensive but not outlandishly pricey gas the news report cannot be reconciled. If people are buying hybrids in droves they should be reducing their driving (their miles traveled is actually expected to increase as the per mile costs decline). No one has looked at the supply of hybrids, which have had waiting lists for a while now. Production may have just caught up to demand. Since transit is experiencing a surge in ridership, you'd hope the agencies would do something to maintain the ridership. That seems like a lost cause, at least in LA. As D.J. Waldie describes, transit service is getting worse in LA partly because of the interest in express buses and certainly because of trains. The most recent budget proposal from MTA allocates 23% of the total $3 billion budget to trains, which have a handful of lines compared with the hundreds of bus lines. About 14% of the budget goes to roads and bridges. With this type of investment no one will find the LA transit service worth continuing to take once they get used to high gas prices or finally buy that Prius.

Ultimately, however, travel is considered a derived demand. When the demand for travel declines lower demand should be seen elsewhere. Right now I can't reconcile the data available. I suspect every story has some truth, but the actual evidence will still have to be figured out.

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