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Higher gas prices go down without choking

Wall Street Journal

With gasoline prices in the United States approaching an average of $3 a gallon, Americans are moaning about the rising cost, but they are resisting big changes in their gas-guzzling ways.

A 25 percent jump in prices at the pump since December has set off a firestorm in Washington. Politicians are threatening automakers with tougher federal fuel-economy standards and oil companies with higher taxes on record profits, while warning against price gouging. Auto and oil executives are predicting that a long-term shift toward greater fuel efficiency is under way. But none of these influences is likely to have much effect on gasoline prices or oil consumption in the near term.

Unlike the energy crises of the 1970s, which resulted from reduced supplies of Mideast oil, today’s crunch is largely because of a swift rise in global oil demand. The surest way out of the problem, most experts agree, would be to curb consumption of vehicle fuel, particularly in the United States. For years, economists have argued that the most effective way to moderate U.S. demand would be to hit Americans with significantly higher gasoline taxes. Today’s high prices amount to a market test of that theory.

The early results: High prices have some effect, but prices would have to be higher than they are today — and would have to stay high for a long time — to meaningfully curb gasoline consumption by the nation’s huge fleet of cars and trucks, which accounts for about 10 percent of global oil use.

At the margins, there are signs that high gasoline prices may be starting to alter consumer behavior. Traditionally, gasoline use in the country rises about 1.5 percent each year.

But in three of the six months from September — immediately after the Gulf Coast hurricanes — through February, gasoline consumption fell compared with a year earlier, according to data from the U.S. Energy Information Administration. In the three months in which it grew, it never rose by more than 0.4 percent. Yet in March, as gasoline prices soared, demand appeared to return to more robust levels, growing by 1 percent, according to preliminary data.

“There’s definitely a noticeable decrease in the growth of demand,” said Tancred Lidderdale, senior economist at the Energy Information Administration. “The problem is, demand is still growing.”

Though the recent runup in gasoline prices has been steep, it hasn’t been debilitating for most Americans. The price of a gallon of regular gas averaged $2.74 in April, according to the Energy Information Administration. Adjusted for inflation, that was 14 percent below the peak in March 1981 when, in today’s dollars, gasoline averaged $3.18.

Moreover, Americans are better-positioned to handle a runup in fuel prices than they were a quarter-century ago. Gasoline accounts for 3 percent of personal-consumption spending, down from 5 percent in 1981, according to the U.S. Bureau of Economic Analysis. That gives many consumers less reason to contemplate cutbacks when prices rise.

Even Americans who want to slash their gasoline use will find it hard to do so in a society built on cheap energy, where far-flung suburbs and powerful cars are the rule.

“If you’ve got to drive to work every day, you’ve got to drive to work every day,” said John Felmy, chief economist of the American Petroleum Institute, the oil industry’s Washington trade group.

Research suggests it takes years for higher gas prices to meaningfully dampen 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 percent to produce an initial 1 percent drop in demand.

What influences gasoline use more quickly than gasoline prices, experts say, is a change in personal income. Among the first things Americans do as their paychecks get bigger is to buy zippier cars and drive their existing cars more.

Incomes have been rising here, as they have throughout most of the industrialized world. The result: “It takes a very big price increase to have a big impact today,” said Philip Verleger, a Colorado oil economist.

Verleger estimates that real, or inflation-adjusted, gasoline prices have to rise at roughly five times the rate of real income just to keep the nation’s gasoline demand flat. Given that real income is rising at about 3 percent a year, real gasoline prices would have to surge 15 percent to prevent consumption from growing, according to his analysis.

Broadly, the latest federal statistics appear to bear him out. In the first quarter, the real price of gasoline averaged about 17 percent more than a year earlier, and U.S. gasoline consumption was up 0.3 percent — fairly close to flat. Still, Verleger and federal energy officials caution that it’s too early to discern any long-term trends from the data.

Some major industries say they think a long-term change in U.S. gas consumption is in the works. At the top of the list is the auto industry.

Sales of traditional sport utility vehicles — the ones built on the guts of pickup trucks, which tend to consume the most gasoline — are falling fast. The decline began in 2003, when gasoline was cheap, but it has accelerated markedly since prices began rising in early 2005. Sales of truck-based SUVs, which fell 4 percent in 2003 and 3 percent in 2004, tumbled 13 percent in 2005 and 7 percent in the first quarter of this year.

The traditional SUV market is “collapsing,” said George Pipas, Ford Motor Co.’s U.S. sales-analysis manager.

When gas prices first began creeping higher, automakers offered bigger sales incentives on SUVs, effectively giving buyers “a gas card in the glove box,” Pipas said. But the continued rise in gasoline prices has largely inured buyers to such inducements.

Yet plenty of Americans still are buying fuel-thirsty rides. Despite the weakness of the SUV segment, U.S. sales of the recently redesigned Chevrolet Tahoe SUV soared 37 percent in the first quarter. And luxury cars not known for their fuel economy remain hot sellers. In the first quarter in the United States, BMW sales rose 11 percent, Mercedes sales climbed 17 percent and Porsche sales surged 26 percent.

Higher gas prices go down without choking 06/08/09 [Last modified: Monday, June 8, 2009 2:42pm]
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