The EIA (Energy Information Administration), in a recent report, stated that the downward trend of petrol prices have not affected car travel and gas consumption that much.
The agency added that it would take approximately a 25% to 50% reduction in petrol prices before there will even be a 1% increase in automobile travel.
Petrol prices downward trend
Currently, the petrol prices have already dropped by 28% from a high in June of last year to an average price of around $2.68 across the United States.
Normally, an increase in the price of a consumer item leads to lower demand of that particular item, and vice versa. This concept is called price elasticity. For instance, air travel tends to be very elastic. If there’s a ten per cent increase in air fare prices, there will usually be an even greater decrease in air travel.
In the case of auto travel, the movement of petrol prices seem to be less elastic. This is proven by the data gathered by the EIA. Analysts suggest that one reason for this phenomenon is that the distance that people drive to work as well as the distance they drive for daily errands are quite fixed.
Additionally, improved car petrol prices may also balance out the increases in distances travelled, which leads to more stable fuel consumption. Historically, price changes have greater effects if the deviations persist over time, unlike temporary changes that only induce momentary shocks.
As it is, the U.S. average retail price per gallon of regular automobile gasoline has dropped 28% from a high 2014 peak of $3.70 per gallon on June, 23, 2014 to a low of $2.68 per gallon on December 8.
Analysts predict petrol prices will continue to fall
There are economic indications that the petrol prices will still continue to fall – and yet there is still very little effect on car travel. This proves what the analysts are saying: gasoline prices are relatively inelastic. That means changes in fuel prices do not necessarily translate in greater fuel demand.
The Short-Term Energy Outlook (STEO) of the EIA uses a price elasticity of (-) 0.02 to calculate and forecast consumption of automobile gasoline. It also considers the anticipated changes in fuel economy and travel demand.
EIA’s SETO for December 2014 estimated that petrol prices in 2015 will be 23% lower than the average of 2014. It also estimated that the December consumption will not change from year-earlier levels since increased fuel economy balances out increases in vehicle miles travelled as a reaction to falling gas prices.
Analysts have proffered many reasons for the inelasticity of petrol prices. Among them are the slowing of per-capitavehicle miles travelled, population migration to rural areas, the reduced share of household income earmarked for automobile petrol prices, the retirement of the baby boomer generation since retirees usually reduce their driving when they are already growing old, and the decline in licensing rates for teenagers.
