Price Elasticity of Gasoline

I see more bicycle commuters this year, possibly due to gas prices going up. So, I started to wonder about the price elasticity of gasoline.

Price elasticity is the amount demand changes in response to price. To oversimplify just a bit, a price elasticity of -2.0 (typical of many consumer packaged goods) means if the price goes up 10% the demand goes  -2.0 * 10% = down 20%.

So, what does a bit of Googling get me?

The Mackinac Center for Public Policy http://www.mackinac.org/article.aspx?ID=1247 estimates the short run elasticity at -0.2 and the long run elasticity at -0.7.  This makes sense -- in the short term, you are still driving the same car from the same house to the same job. In the longer run, you are likely to change one or more of these things.

An FTC study in 2005 http://www.ftc.gov/reports/gasprices05/050705gaspricesrpt.pdf cited studies showing  a -0.23 elasticity in the short run -0.6 elasticity in the long run (more than 1 year). The long run number is from Molly Espey's meta-analysis of 42 studies.

The Environmental Economics blog quoting a Wall Steet Journal article, http://www.env-econ.net/2006/05/inelastic_short.html quotes the WSJ as saying "Research suggests it takes years for higher gas prices to meaningfully damp consumption. Opinions differ, but many experts say that, in the short term, the "price elasticity" of U.S. gasoline use is as low as 0.1. That means gas prices have to rise 10% to produce an initial 1% drop in demand.

The Cascadia Scorecard Weblog http://cascadiascorecard.typepad.com/blog/2005/09/is_gas_elastic.html notes that "In 1999 you could buy a gallon of gas in Washington state for less than a buck.  As recently as 3 years ago, gas prices averaged about  $1.20 a gallon.  Right now, though, expect to shell out about $2.85.

So what has a 136% price hike done to gasoline consumption?  As it turns out, not a lot.  In 2002, the average Washington resident went through about 8.4 gallons of gas per week.  Based on data through July 2005, that's now down to about 8.1 gallons per week -- a 4 percent reduction. (graph at right)"

If there were no other factors involved, this would be, let's see, a 136% price hike, and a 4% reduction -- that would be a -.03 elasticity.  But there are other factors involved, and at least there's been a leveling off.

So, everybody agrees the short term elasticity is low. So, for those interested in profits NOW, the answer is try and move the price up.

As for the long term -- well, as Keynes said, "in the long run, we are all dead."

So, I'm riding my bicycle. And, when the Iraq war started, I feared it would go badly and instead of increasing the flow of oil had a decent chance of doing the opposite. So, I bought BP and Shell stock. I'm happy with that decision.