Price up, demand down

Total driving on highways in the US was down 3.7% for the month of May compared with May 2007, with gas prices up 25%. The experts say that demand for gas in the short term is relatively inelastic because it is affected by long-term decisions such as what kind of car to buy and where to move, and so we won't see demand really fall off for a while yet.


PS: On a side note, I would like to take this news item as a case study of the suckiness of traditional newspaper writing in the age of the internet. First read this Reuters piece, then read this blog entry by CBS guy Kevin Drum. The first, you will notice, is terrible. Why it's terrible:

• Even though it's short, it's bloated with all these vapid quotes from the Secretary of Transportation.
• The first sentence tries to jam too much information in and ends up leaving out a critical piece of information: driving is down 3.7% compared to what? Compared to the previous month? Compared to the same month last year? I had to look elsewhere for the information.
  
• The author insists on expressing increases and decreases in the meaningless absolute terms of millions of total miles driven. Nobody has an intuitive grasp of these figures--so why not stick with percentages?
• There are no links to the source material.
• There are no charts or graphs.

The Drum entry is concise, contains links to the source material, and even seems to be written by someone who knows what the hell is going on. Kevin Drum 1, Tom Doggett (and/or his editor Walter Bagley) 0.

The effects of rising gas prices

Paul Krugman has a post about the long-term elasticity of gas prices:

In the long run, the best estimate of the price elasticity of demand for auto fuel seems to be -0.7. That is, a 10 percent rise in prices will reduce gas consumption by 7 percent. Of this, 4 points come from shifting to cars with better mileage, 3 points from driving less.

If it's true that there's a widespread perception that gas prices are rising because worldwide demand is outpacing worldwide production--and that this trend will continue for the foreseeable future--then I bet the change in consumer's behavior would be even more drastic.

For example, if I thought that gas prices would increase but soon stabilize, or if I thought that they would eventually come down again, then I might still buy a more fuel-efficient car and drive less, but wouldn't make any more drastic lifestyle changes.

However, if I thought that there was no predictable ceiling on gas prices at all, I might make a more drastic and permanent decision, like moving from the suburbs to the city to eliminate a lengthy commute, or move somewhere with decent public transit options. Moreover, cities would start seeing a demand for more public transit and higher density housing that is closer to places of employment.

So I wonder what the public's perception is as to why gas prices are increasing, and whether they think the trend is likely to continue for a long time.