Is gasoline elastic?

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Friday, September 16, 2005
By Yokota Fritz

I joked the other day about the economic term "elasticity of demand." What this means is the amount that the demand of a product changes in relation to the price. Luxury items are the usual example of an elastic product -- most of us can live without a yacht or airplace, at least in the short term. The usual example of an inelastic product is gasoline: most of us need to drive to work, school, food shopping, and errands; and if we run out of gas we usually can't delay the purchase until the price goes down.

Dr. James Hamilton is professor of economics at the University of California, San Diego. He thought it remarkable that gasoline prices aren't even higher than they are now.. 56% of Gulf Coast oil production remains unavailable and 5% of total U.S. refining capacity could be shut down for an extended period of time. "Release of oil from the SPR, temporary rationalization of fuel standards, and assistance from foreign countries surely helped," Hamilton writes, "but could not be expected to reverse completely the significant lasting damage wrought by the hurricane. So why didn't the storm have a bigger effect on prices?"

His answer: "U.S. consumers are finally responding in a significant way to price incentives." In other words, there is some degree of demand elasticity in gasoline. Petroleum usage dropped a dramatic 9.5% between August and September, according to the U.S. Energy Information Administration. In some ways, Americans are using less gasoline, either by reducing long trips, combining short trips, and using "alternate modes" of transportation such as carpooling, bicycling, or riding public transit. I know several people who aren't driving the SUV into work anymore, taking the much smaller second car.

The eRideShare carpool service reports a sixfold increase in new carpool listings over their previous record after gasoline hit $3/gallon in the U.S. According to eRideShare executive director Steven Schoeffler, "People are realizing that they can save thousands of dollars a year by carpooling. At the same time, they know that they're helping to reduce our dependence on foreign oil and reducing greenhouse gas emissions by sharing the ride."

In my local area, I've noticed an increase in bicycle commuting. People are asking me for advice on what type of bikes to buy. One local bike shop owner tells me he's been having a hard time keeping commuter gear in stock -- things like panniers, racks, and lights. The local public transit district and their drivers also report that ridership has increased tremendously over the past month.

How about you? What are you doing differently to reduce your gasoline spending? Please comment below.

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Become a one-car family. Every time you fill up, maintain, repair, inspect, insure that one car, be grateful that it's not X2 or X3.
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