Thursday, June 19, 2008

Shocker: Americans Driving Less

The Law of Demand (the more something costs the less you demand of it, the less something costs, the more you demand of it) is starting to have an effect on fuel.
Americans drove 1.4 billion fewer highway miles in April than they did in April 2007, the Department of Transportation said Wednesday.

That marks the sixth consecutive monthly drop and coincides with record gas prices and an increase in transit ridership, Transportation Secretary Mary Peters said.

April's drop is more than three times larger than the drop from March 2007 to March of this year, which was 400 million fewer highway miles.

Peters said vehicle miles traveled on all public roads for April fell 1.8 percent from April 2007.

Americans have driven nearly 20 billion fewer miles overall this year and nearly 30 billion fewer miles since November, the department said.
Surprise, surprise! The increasing price of gasoline is causing people to take steps to conserve fuel. This fits with previous empirical evidence that the U.S. consumer starts conserving when the price of gas gets to about $3.50 a gallon, adjusted for inflation. Below that price, we just tend to complain but not change our consumption behavior.

Due to time lags in drilling and refining (approximately 10 years, I hear, but I'm not a petroleum industry expert), the only effective way to lower the price of gasoline at the pump in the short run is to cut demand/consumption. While gasoline has what is called an "inelastic demand" (demand tends to not be sensitive to a price increase), eventually you hit a price where people are priced out of the market.

More drilling and refining will help long term, but the best way to see the prices come down is to find ways to consume less of the product. This will create a surplus and the price will drop at the pump. I know some folks theorize that the oil companies will just drop production then to keep prices high. I really don't think so because of the profit motive somebody in the group will jump production to scoop the market and make a larger profit.

In both the long and short run, market forces and not politicians will fix this situation and bring it to equilibrium.

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