How Cutting Back on Driving Helps the Economy

Cross-posted from City Observatory

As Americans drive less and spend less on fuel, they have about $150 billion annually to spend in other ways.

There are two kinds of economics: macroeconomics, which deals in big national and global quantities, like gross domestic product, and microeconomics, which focuses on a smaller scale, like how the prices of specific products change. Macroeconomics gets all the attention in the news cycle, as people talk about the unemployment rate, the money supply, inflation, and the monthly payroll reports. Micro-economists usually labor in obscure corners, studying things like commodity prices, wage rates, and industry trends.

The President’s Council of Economic Advisers (CEA) is the nation’s leading group of economists, focused heavily on understanding and explaining big macroeconomic trends.

A new CEA report, “The Surprising Decline in U.S. Petroleum Consumption,” highlights an important decades-in-the-making trend in the U.S. economy: we’re consuming a lot less oil that everyone thought we would. Obviously, oil consumption is a big deal in the macro economy. Oil imports are the biggest factor in the nation’s long running balance of trade deficit (we imported 2.7 billion barrels of oil in 2014, at an average cost of $91), and from the first energy crisis of the early 1970s onward, there’s been a strong recognition of the critical role that oil supplies and oil prices played in shaping global and national economic conditions.

While all of the models constructed by the experts, including the Energy Information Administration at the Department of Energy, predicted that U.S. petroleum consumption would grow from 18 to 30 million barrels per day between 1970 and 2030, something very different is happening: U.S. oil consumption has leveled off at about 21 million barrels per day. Even though population is increasing, and the economy is still growing, petroleum consumption has been essentially flat.

What’s keeping consumption down? According to the CEA analysis, transportation explains 80-90 percent of the trend. While industrial, commercial, and residential energy use have generally followed predictions, energy use for transportation is far below where it was predicted.

And within transportation, the big savings have come from a surprising source. While many people focus on improved fuel efficiency of cars, that actually turns out to be a negligible factor in cutting energy use. Better gas mileage accounts for only about 15 percent of the difference in 2014. The big factor is that Americans are driving less: vehicle miles traveled are far below projected levels.

Clearly, a combination of demographic, technological, social, and price factors are at work. The big run up in gas prices after 2004 has played a role in reducing driving (and prompting people to buy more fuel-efficient vehicles).

This highlights a couple of things. For one, simple-minded projections based on past relationships are likely to be wrong. Big demographic changes, and shifts in tastes (toward urban living, and away from time spent driving) can dramatically change

And, as the CEA report signals, these have big macroeconomic effects. The decline in petroleum consumption dramatically improves our international trade position compared to what was projected, and means U.S. consumers have about $150 billion annually to spend in the American economy (and their local economies) than if they drove more.

Although CEA characterizes the decline in petroleum consumption as surprising, for those of us who have been following the microeconomics of demand for transportation closely for the past decade, this is old news. But it’s also big news that bodes so well for the macroeconomy and the environment.

  • Jesse

    Good news. Unless your name is Koch.

  • p_chazz

    Or you are a small business person who owns a roadside diner, or you are an auto dealership, or you are a mechanic, or you are an independent gas station owner, or you are a motel owner…

  • Joe R.

    There will be winners and losers every time the economy changes. There’s no much demand for horse shoes these days, but somehow the economy managed to adapt. All those people who might have been making horse shoes if we used horses are doing something else. All the people you mention can learn another trade.

  • zentierra

    As a person who chooses not to drive, I would LOVE to see the kind of investment in bus rapid transit and rail, as well as proper bicycle infrastructure (meaning fully separated from cars) that would allow for trips to that roadside diner, or stays at a motel.

    That gas station owner could expand inventory and services to provide for car-free tourism. Ditto that mechanic.

    But as far as that car dealership…well, F ’em! They have pimped that grotesque vehicular monopoly for far too long, and our lives have been lessened in very important ways because as a result.

  • neroden

    The motel owners can operate HOtels; the roadside diner owners can operate streetside diners; the gas station owners can operate convenience stores (which is basically what they’re operating now anyway)….

    The mechanics can repair things which aren’t cars (there are plenty of ’em), though I’d advise them to learn to do electrical work because mechanical stuff is being replaced by electrical stuff throughout the economy (including in autos).

    And as for the auto dealers, they can go get useful jobs, or they can go become salesmen selling something else.

  • SDGreg

    Driving is expensive and unduly stressful. Once transit reaches the bare minimum for service, it’s so easy to leave driving for any other option.

  • Larry Littlefield

    The good news: younger generations are making wiser, thrifty choices.

    Bad news: they have no choice because they are paid less, and saddled with prior generations’ debts. So they don’t have more to spend on other things as a result. And it is going to get worse.

    https://larrylittlefield.wordpress.com/2015/03/18/the-american-economy-hair-of-the-dog-means-more-debt-for-the-doomed/

    Check out the debt charts that show what was necessary to pay for Generation Greed’s lifestyle. They didn’t sell off the future because they were unproductive, but because it cost more than even they could produce. Who will be paying those debts when they are gone?

    Off the books debts — past infrastructure underinvestment, and pension underfunding, are in addition to this. I just got an e-mail that said the to keep Social Security benefits at current levels taxes would have to rise by 2 1/2 percent of payroll. Or benefits would have to be cut by a quarter. That’s how much less workers and/or the retired will have to spend.

  • Charles_Siegel

    A tax of 2 1/2 percent is equal to a year or two of economic growth. People won’t necessarily have less to spend: they will have to wait an extra year or two before they have more to spend.

    The problem is that almost all the benefits of growth are now going to the very wealthy. We need to change the tax system to reduce inequality: higher taxes on the very wealthy, lower taxes on the middle class, a higher Earned Income Tax Credit for the poor.

    Blame this generation of billionaires, rather than blaming past generations, and there is an obvious solution to the problem.

  • R.A. Stewart

    Thank you. (Speaking as a member of what Larry calls Generation Greed, whose most gut-grinding worry is the kind of world my children and grandchildren will inherit.)

  • R.A. Stewart

    Not that transit in most of the U.S. will ever reach the bare minimum.

  • Larry Littlefield

    That economic growth includes population growth. Real, per person living standards are going down.

    “The problem is that almost all the benefits of growth are now going to the very wealthy.”

    And not the merely wealthy anymore. The pattern of each generation being less well off financially than the one before at each stage of its life started with high school dropouts after 1973, worked its way up to high school graduates in the 1980s (heyday of the yuppies) and mere college graduates without advanced degrees in the 1990s. In the 2000s only the one percent got ahead, but after 2008 even they were affected (thus explaining the Team Party). So now it is only the very wealthy.

    They would have been wiped out in the bonfire of bankruptcy in 2008 if the government hadn’t bailed the whole thing out. But now the government is broke too, federal state and local. So how long before even CEOs are a lot less wealthy than CEOs used to be, if only because there is less around to steal?

    https://larrylittlefield.wordpress.com/2015/03/18/the-american-economy-hair-of-the-dog-means-more-debt-for-the-doomed/
    You look at the rise in total debt over the past 35 years and tell me there’s no problem.

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