Thursday, May 15, 2008

High oil prices causing soul searching or pleas for relief?

High oil prices seem to be traumatizing societies that have become accustomed to cheap fuel. Some of the noisiest pain seems to be in the United States.

Pleas for relief have been a prominent response. But rising fuel prices are also prompting more interesting responses. Here I highlight a few from the North American blogosphere.

Robin Chase has some wise words at her Network Musings blog against subsidizing gasoline. She uses Indonesia as a cautionary tale.
As it stands now, we are already experiencing a gas tax holiday, every day of the year. Our gas taxes have 42% less buying power today than when established in 1993, which is why our road infrastructure is in such sorry state of disrepair. Imagine trying to keep your own life in good working order with 42% less buying power.

And indeed, filling up the gas tank is taking a significant bite out of the average family’s household budget, and is forcing difficult choices among those with the lowest incomes.

Is subsidizing the answer? It might be, for some very small slice of Americans. Which doesn’t mean it should be for all Americans.

Indonesia gives us an example of what this path holds. That country has been subsidizing gas for its population for years, initially certainly with good intentions of helping ease the cost of a perceived necessity. This year, Indonesia anticipates that these subsidies – 40% of the real cost of fuel -- will eat up 13% of its federal budget, more than it spends on education and health care.

Todd Litman reminds us that
yes, economic basics do still apply. Higher prices tend to reduce consumption, even of motor fuel, even in the United States. The effect is stronger over the medium and long term.

It turns out that the “law of demand” (the tendency of higher prices to reduce consumption) and the principles of urban economics (that improved accessibility increases land values) still apply. If we are smart, we can use these to help solve problems and benefit consumers.

It took a while, but there is mounting evidence that rising fuel prices are reducing fuel consumption and vehicle travel. Between 2006 and 2007 average Regular gasoline prices increased about 9%, from $2.53 to $2.77 per gallon, and according to Federal estimates, annual U.S. vehicle miles traveled (VMT) declined about 0.4 percent in total, or about 1.3% per capita, indicating a short-run elasticity of about 15%. Between Januarys 2007 and 2008, California average gasoline prices increased about 25%, from $2.62 to $3.30 per gallon, and gasoline consumption declined 4.5%Transportation Elasticities). in total, or about 6% per capita, indicating a short-run price elasticity of about -0.23. Long-run elasticities (more than five years) are typically about three times larger, or about -0.5 to -0.7, which is pretty typical historically (

Todd's policy responses to the fuel price spike might seem unpalatable or unrealistic to suburban Americans who live in places where alternatives to the car are unattractive. But they are much more constructive than the tokenism of a gas tax holiday or the US Senate's plan to suspend the topping up of the Strategic Petroleum Reserve. Todd says:

This is actually good news overall, if we act rationally (Appropriate Response To Rising Fuel Prices). Reduced driving and fuel consumption, shifts to alternative modes, and more accessible development help reduce many problems including traffic congestion, road and parking facility costs, accidents, energy production externalities, pollution emissions, and health problems associated with sedentary living. But achieving these benefits will require changing our transportation and land use policies to reflect shifting consumer demands.


CEOs for Cities released a report linking the collapse of the US housing bubble to rising fuel prices. Their blurb:

A new analysis shows that high gas prices are not only implicated in the bursting of the housing bubble, but that the higher cost of commuting has already re-shaped the landscape of real estate value between cities and suburbs. Housing values are falling fastest in distant suburban and exurban neighborhoods where affordability depended directly on cheap gas.

The report got quite a bit of press coverage. The Smart Growth Around America blog points out:

What makes the report so valuable, however, is that they don’t stop at merely pointing out that suburbs are struggling while city neighborhoods are holding their value. Cortright offers some concrete policy recommendations that will help make housing more affordable, while increasing the availability of housing in places where homeowners can have more options for getting to work, school or the grocery store than filling up the car with 4 dollar gas.

1 comment:

  1. As an addendum to this post, Todd Litman's latest posting at Planetizen (http://www.planetizen.com/node/31269) has this cute observation:

    "People’s response to death typically proceeds through various stages: disbelief, denial, anger, bargaining, guilt, and eventually acceptance and hope. Motorists’ response to increased fuel price seems follow similar stages:

    * Disbelief – After a lifetime of inexpensive fuel many people simply cannot believe that the situation could change.
    * Anger – Yell, spit and scream. This is something to get emotional about.
    * Stupidity – Search for a magic solution to make the problem disappear: gizmos, subsidies, prayers...
    * Blame – Point fingers outward: big oil companies, government agencies, foreigners, environmentalists, whoever...
    * Greed – Demand that fuel prices be reduced, regardless of resulting harms. Convert food crops into fuel. Subsidize fuel production. Reduce fuel taxes. Attack weak oil-producing countries. Drill oil in wildlife reserves, and convert tar sands and oil shales to gasoline, despite social and environmental damages.
    * Acceptance – Realize that fuel costs really are increasing.
    * Rational response – Prepare for a higher fuel cost future.

    Americans are apparently still in the “Stupid” and “Greed” stages."

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