Consumer Behavior and $4 Gas: an Economics Case Study

Lynne Kiesling

Yep, I’m gonna pile on here with my friends at Environmental Economics and other places about how consumer responses to $4 gas are manifesting themselves. To quote John (whose post is about SUV markets in particular):

1. Gas prices rise
2. People drive less
3. Gas prices stay high
4. Demand for new SUVs falls
5. Prices of new SUVs fall
6. Supply of used SUVs rises (and demand falls)
7. Prices of used SUVs fall

From Grist, here’s a synopsis of several news stories (with links) on the consequences of these individual behavioral responses to higher gasoline prices:

New numbers show that Americans drove 4.7 percent less in June 2008 than they did in June 2007, shaving off some 12.2 billion miles. For those keeping track at home, that makes a total 53.2 billion fewer miles driven between Nov. 2007 and June 2008 than in that eight-month period a year earlier. As would be expected, gasoline and diesel use have also fallen: In the first three months of 2008, Americans burned 400 million fewer gallons of gas than they did in the first three months of 2007, as well as 318 million fewer gallons of diesel. And easing off the gas pedal has eased oil demand as well: In the first half of 2008, U.S. demand for oil fell by an average 800,000 barrels per day compared to the first half of 2007, the biggest decline since 1982. Not to be left out, sales of cars, trucks, and vehicle parts fell 2.4 percent from June to July.

The biggest decline in oil demand since 1982. Yowza. This is indeed a textbook case of how response to price signals changes behavior and ripples through our complex, interconnected global economy, communicating valuable distributed information, reallocating resources, and changing investment decisions along the way.