The End of Peak Driving?

Cross-posted from City Observatory

A little over a year ago, a gallon of regular gasoline cost $3.70. Since then, that price has plummeted, and remains more than a dollar cheaper than it was through most of 2014.

Over the same period, there’s been a small but noticeable uptick in driving in the US. After nearly a decade of steady declines in vehicle miles traveled per person, car use has suddenly pushed upwards. Average miles traveled per person, which were 25.7 a year ago, have jumped up to 26.4 in July—the first sustained increase in driving in more than a decade.

Some in the highway community have heralded the growth in driving in recent months as a sign that we need to invest much more in road construction.

The increase isn’t very big, however. In historic terms, Americans are now driving at about the same rate as they were in 2000. It would take nearly a decade of growth at the current rate of expansion just to get back to the level of driving of 2004. But there’s little reason to believe anything like that is in the cards.

Graph: Federal Reserve Bank of St. Louis
Graph: Federal Reserve Bank of St. Louis

During the long period of driving declines, many were tempted to dismiss gas prices as a factor in shaping driving behavior, arguing instead that the decline was solely due to demographics, changing tastes, improved communication technology, and American’s falling out of love with cars. All of these trends were in play, but it’s clear now, as it should have been then, that price matters.

Nevertheless, highway advocates have predictably seized on the uptick in driving to claim that we need to throw a lot more money at road widening projects. Does the upsurge in driving really signal an end to the millennial abandonment of motoring? Is there a renewed “love affair” with automobile?

We would argue no: The cultural explanations of the driving trends have to be read in the context of prices. Millennials coming of age in the era of $4.00 a gallon gas behave very differently than baby boomers who paid 29 cents a gallon.

For some people, however, this is not obvious: they look at the trends in gas prices and vehicle miles traveled (VMT) and conclude that there’s little correlation. The very sharp Doug Short at Adviser Perspectives, argues, for example, that “the correlation is fairly weak over the entire timeframe.” Similarly analysts at the State Smart Transportation Institute argued that: “There is no clear evidence that fuel prices have distinctly influenced driver behavior during the past decade”

But “price elasticity”—the way that people change their consumption behavior in response to how much something costs—still matters. The fact that driving has risen as gas prices fall is far from a coincidence. In fact, evidence shows that Americans react to higher gas prices by driving less—and to lower gas prices by driving more.

Credit: Advisor Perspectives
Credit: Advisor Perspectives

It’s important to remember that there’s no reason to expect the reaction to changing gas prices to be instantaneous. An axiom of economics is that elasticities are larger in the long run than the short run. People make so many decisions (where to live and work, whether to own a car, etc) that can’t be changed immediately. Likewise, perceptions and expectations about future price changes make a big difference: Few people anticipated the advent of $4.00 per gallon gasoline in the early 2000s. The technical challenge with estimating price elasticities is that analysts have a hard time sorting out short term and long term effects (prices change rapidly, behavior much more slowly), and many of the changes in prices are either too small to be noticed by consumers or short-lived. As a result, the reaction to price changes plays out slowly, over time—the decline in VMT per capita after 2008 continued right through 2013, even though prices were not increasing above their previous peaks.

But while it may be attenuated, and play out gradually over time, there is still a behavioral response to changing prices. Already, there’s evidence that the decline is gas prices has produced a change in the kind of vehicles we’re buying. The sales-weighted average fuel economy of new vehicles, which has been steadily rising, and reached a high of 25.8 miles per gallon in the summer of 2014, has fallen by 2.3 percent to 25.2 miles per gallon today, according to researchers at theUniversity of Michigan. Because of the long life of vehicles, lower fuel economy gets “baked into the cake”: meaning that lower fuel prices today produce greater fuel consumption and more emissions for years to come.

And while there may be a break in the longer-term decline in VMT per capita, there’s little reason to believe that we’ll see a return to the long term growth path that prevailed in the 1980s and 1990s—growth that many transportation departments’ forecasts still cling to.

It’s certainly true that demographics (an aging population), changes in tastes (the growing preference for urban living, biking and walking), and technology (the ability to use telecommunications to reduce trip taking) will all continue to contribute to a diminished demand for driving. But prices still matter. What we’re embarking on, courtesy of a highly volatile and unpredictable global market for petroleum, is a very interesting experiment to find out exactly how much—in economics terms, to discover the price elasticity of demand for driving. We’ll be watching to see the results.

16 thoughts on The End of Peak Driving?

  1. That old cliche’ about “Americans’ love affair with the car” is, to me, rather inaccurate. For a large percentage of car owners, it’s more a “marriage of convenience”. Auto enthusiasts and columnists look down their noses at Toyota Camrys and Honda Accords, calling them “appliance cars’, but these “marques” outsell the “sportier” and “more fun to drive” models. Most drivers want reliability and comfort, not excitement. Car commercials on TV often show winding mountain roads or even race tracks, places where relatively few miles are racked up, but which provide better “eye candy”.

  2. Interesting. I concur that prices surely matter. I think another important dimension similar to automobile fuel efficiency the author mentioned is housing policy or housing prices. Long story short, even if surveys are correct that preferences for urban living are increasing, if urban housing policy restricts supply or makes it expensive to build, we should expect more population to live in suburban places where cars have more advantages.

  3. It’s worth noting that these low fuel prices are unsustainable. What happens is the harder to extract sources are shut down because they would operate at a loss. This means more oil from easier to extract sources. All good and well except that the easier to extract sources are largely disappearing. End result is sooner or later the demand will exceed the supply, prices will go up, and it will once again be economical to restart the harder to extract sources. Next time though it will be in the oil company’s best interests to keep the price high so they can tap more of the harder to get at sources (which they’ve spent considerable sums to exploit).

    The good news is high oil prices put a damper on driving. They also make alternative energy sources more competitive. The biggest plus is if they’re sustained, we’ll see a lot of pressure to mass produce electric vehicles. This will be a game changer in that once mass-produced electric vehicles cost less to buy. They’ve always cost less to operate. Once the public gets a taste of electric vehicles I suspect it would take $1 per gallon or cheaper gas to even get them to consider going back to ICE vehicles. That won’t happen. Even if transportation demand for oil is reduced, there are enough other uses to keep the prices fairly high. And world demand is increasing as well.

  4. In the short term, people react to higher gas prices by driving less. In the long term, they react by buying more efficient cars.

  5. People won’t convert to electric so quickly. Gas cars are, for the most part, reliable and cheap. That’s a *huge* bonus and the benefits become greater as vehicle size (and weight) increases.

    More likely, electric cars will catch on in suburbs and dense urban areas but Diesel will come to replace gas everywhere else and reign king.

    As for the current gas prices, it fluctuates so much due to larger political issues and economic speculation outside the scope of public transit planning. There’s not much for state DOTs to do other than assume that what they already know will continue. It’s an unfortunate state of affairs. Of course, expect gas prices to spike again in 24-48 months when the existing supply is exhausted and all the fracking companies go bankrupt. Which is good for the Saudis, unless say an Iranian backed government comes to power in Yemen and blocks the gulf oil trade.

  6. People will convert to electric cars or plug-in hybrids rather than diesel because of limits on greenhouse gas emissions.

    Unfortunately, this will make it cheaper to drive, so it will likely make people drive more. EVs have a higher initial cost but a lower operating cost. They are currently more expensive overall than gas cars. But once you have bought an EV, you make the decision about whether to drive based on the cost of fuel, which is much less for an EV. Fixed costs are higher for EVs than for current cars, but variable costs are lower – and after they have paid the fixed cost, people make the decision about whether to drive based on the variable costs.

  7. Remember the primary reason EVs have a higher initial cost is simply because they’re made in much smaller numbers. If you think about it, gas engines require a lot a machining to very fine tolerances, very complex multispeed transmissions, very complex fuel delivery systems, etc. Electric cars require an electric motor, a battery, and some sort of electronic control system to interface between the two. They’re inherently less complex. If made in the same numbers as gas cars, they would cost less.

    We can still put disincentives to driving into effect with EVs. That might be congestion charges for going into populated areas, maybe some sort of per mile charge since the users would pay no gas tax, etc. In the final analysis an EV is still a motor vehicle with all the downsides that implies, but at least you avoid the pollution issues in populated areas. That’s a huge advantage.

  8. Something about those practical toyota and honda cars depresses me. And I think that’s it. They are fairly expensive cars, in my opinion, for someone who feels like they need something “reliable.” It’s an expense they feel like they can’t avoid. of course, when I look out at parking lots and see that two-thirds are trucks or suv I feel depressed for a different reason.

  9. Some years ago, I wrote an essay on “why the automobile took over local and intermediate distance travel”, inspired in part by my fascination with electric railways. And, I supposed one of the reasons for your dismay at seeing these “practical” cars (presumably when you’re rolling along on your bike) is the idea that most Americans have sold their souls to “motordom”. And I’m reminded of (I think) the Mayor of Bogota, Colombia, who said something about how the sign of a great city is not that the poor people have cars, but that the rich people ride the transit system. Regarding the use of trucks that rarely haul anything heavier than the groceries or a case of beer, and SUVs that rarely get off pavement, I remember a Consumer Reports item about a minivan that said something like, “Sorry, image conscious parents, this minivan makes a lot more sense for filling family transport needs than any SUV.”

    Full disclosure: from 1973 to 1984 my regular “ride” was a 1960 Ford pickup. The interior was mostly sheet metal andit had no radio or air conditioning; compared to todays “tinsel trucks” it was not that far removed from my dad’s 1929 Chevy rig. But it hauled many tons of railroad iron and streetcar parts for the railway museum I belong to, and my daughters learned how to drive a “stick shift” in it.

  10. I’m skeptical that we’ll see any type of densification of most urban environments. NIMBYism will head most of this off. Fuel prices may provide a “floor” to how un-dense future development becomes, but NIMBYism will certainly provide a “ceiling” as to how dense it becomes. Case in point, Boulder, CO.

  11. Leasing a Honda Fit for about $150 a month (solely to transport my dog since he’s not allowed on transit). It seemed like a pretty reasonable expense.

  12. FWIW, electric cars are MUCH more reliable than gasoline cars. And of course they’re much cheaper to operate, even at current gas prices.

    The main obstacle to electric cars is the high upfront price. Almost all of that is due to the cost of the battery. (This is one reason why hybrid designs are taking over so quickly, with electric motors powered by a gasoline generator — without the battery costs they can stay fairly cheap, while having most of the benefits of electric driving.)

    Because of the high upfront price, the people who see the most benefit from conversion are those who drive large numbers of miles (but can afford the extra time to charge). City bus purchases have been very conservative, but I expect city buses to go electric very, very fast once the “oh, it’s new” factor wears off.

  13. Well, most people would say that the primary reason EVs have a higher initial cost is the cost of the batteries. But it is true that that is high *partly* because they’re made in smaller numbers.

    Even with the Gigafactory, though, I still expect that there will be a “battery price premium” embedded in electric cars.

    If made in the same numbers as gas cars, I’m not sure electric cars would cost less upfront (because of the battery), but I’m sure they’d have lower Total Cost of Ownership over 5 years.

  14. It’s possible to overcome NIMBYism if your municipality is geographically large enough. Can’t do a damn thing with Beverly Hills, an enclave of NIMBYS where nobody who wants more housing will ever be able to live there — but in a city with reasonable borders, a bunch of the people who want more housing will actually be living in the city and able to vote.

  15. Lithium’s cheap. It’s actually the cobalt in the batteries which is expensive. (I’m amazed how many people don’t know this.)

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