Gasoline Prices Affect Fuel Economy

The $4 per gallon gasoline prices observed in early 2008 could result in a sizable increase in fleet fuel economy -- that is, an increase in average fleet miles per gallon, or MPG - of 3.27, or 14 percent, relative to 2005.

In How Do Gasoline Prices Affect Fleet Fuel Economy? (NBER Working Paper No. 14450), authors Shanjun Li,Roger von Haefen, and Christopher Timmins rely on a unique dataset of passenger vehicle registrations in twenty U.S. Metropolitan Statistical Areas (MSAs) from 1997 to 2005 to study changes in the vehicle fleet and how gasoline prices may influence fleet composition choices. Gasoline prices can affect fleet fuel economy in two ways: by shifting purchases of new autos toward more fuel-efficient vehicles and by speeding up the scrappage of older, less fuel efficient vehicles.

The authors estimate that a 10 percent increase in gasoline prices from 2005 levels will generate a 0.22 percent increase in fleet fuel economy in the short run and a 2.04 percent increase in the long run - ten times the short-run effect. The $4 per gallon gasoline prices observed in early 2008 could result in a sizable increase in fleet fuel economy - that is, an increase in average fleet miles per gallon, or MPG - of 3.27, or 14 percent, relative to 2005. There also would be a large accompanying reduction in gasoline consumption if these high prices were to remain permanent.

The fleet fuel economy in the United States is currently the lowest among the industrialized nations and is falling further behind. In 2002, the average fuel economy of the U.S. vehicle fleet was about 13 MPG below that of countries in the European Union and 21 MPG below that of Japan. Many policy instruments - such as increasing the federal gasoline tax, tightening Corporate Average Fuel Economy (CAFE) standards, subsidizing the purchase of fuel efficient vehicles such as hybrids, and taxing fuel-inefficient "gas guzzling" vehicles - purport to deal with the effects of gasoline consumption. With volatile gasoline prices and growing concern about global climate change, local air quality, and energy security, political support for curbing U.S. fuel consumption has increased dramatically in recent years.

In the 1970s, record-high gasoline prices and government policies led to increases in fleet fuel economy that were partially undone by receding gas prices in the 1980s and1990s. The authors suggest that recent high gasoline prices could reverse these trends, resulting in the development and diffusion of fuel-saving technologies that could not be achieved politically through gasoline tax increases. The United States consumed 7.6 billion barrels of oil in 2006, roughly one-quarter of global production, with gasoline accounting for 44 percent of oil consumption. Therefore, how the U.S. passenger vehicle fleet responds to changes in gasoline prices may have important implications for climate change, local air pollution, and a host of other issues.

-- Lester Picker