pain at the gas pump won’t do much to get us out of our cars

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As global gasoline prices soar and governments step in to cut costs, is there a time when car owners will say enough is enough and switch to another type of transport ? If the story is anything to go by, probably not.

In recent weeks, New Zealand drivers received a nasty shock when fuel prices rose to over NZ$3 a litre, before falling back to around $2.60 after the government temporarily reduce fuel taxes by 25 cents a liter and the market calmed down. In Australia, the government has promised to introduce some form of cost reduction measures in the next budget.

Despite these temporary actions, greater price volatility was predicted. And there’s no doubt that fuel prices are on the community’s radar. But will rising fuel prices change behavior? Unfortunately, the available data tell us very little.

Pump pain does not change behavior

Fuel prices change on a weekly or daily basis and are reported over the same period, while solid fuel consumption statistics are only publicly available for longer periods.

This makes consumer reaction to sudden price increases difficult to study, unless the price increase is a long-term trend rather than a short-term spike. It is not yet known which of these two scenarios confronts motorists today.

Therefore, to study consumers’ reaction to a long-term increase in fuel prices, it is necessary to go back to the 1973 oil crisis when oil prices suddenly quadrupled and stayed that way for more than a year.

So what do motorists do when faced with a massive and sustained increase in gas prices? As we saw during the crisis of 1973 and beyond, the consistent answer to this question is “not much”.

In the decades following the oil crisis, the number of cars in New Zealand has continued to rise and the country is now ranked fourth in the OECD for car owner.

Although some reduction occurs over the longer term, gasoline consumption appears to be “inelastic” to price changes. In economic parlance, an inelastic good is one where price does not significantly affect demand because there are either few good alternatives, such as gasoline and tobacco, or the product is needed, such as drugs.

A complex oil-driven market

That said, general fuel consumption trends mask many complexities within the market.

Gas guzzlers range from millionaire Porsche drivers driving away to their vacation home to contract cleaners driving to their next gig in a rusting Nissan Micra that is banging out of steam.

A american study in 2019 divided this segment of households into two groups to study their behavior separately: “hand-to-mouth” and “non-hand-to-mouth” consumers.

Day-to-day households are not reducing their fuel consumption because they simply cannot. Their gas consumption is already reduced to non-discretionary use, usually related to work, and this expenditure cannot be reduced without also reducing income.

Often, the “on-demand” work that these households rely on is rigid and not suitable for public transport. Buying an electric vehicle (EV) in such circumstances is a fiscal impossibility.

Households that do not use hand-to-mouth do not reduce their fuel expenditures because they are supporting activities and benefits that generally have a value far greater than the additional cost imposed by higher fuel prices.

Cheap public transport is not a perfect solution

For example, I drive 15 km to get to work every day. It could use about three liters of fuel (I’m not really sure, which is a comment in itself). An increase of $2 to $3 raises my fuel costs from $6 to $9 per day. The cost of public transport for this round trip has decreased down from $6 to $3.

So I could use public transportation, which will save me $6 a day. However, a round trip by car takes 40 minutes, while a round trip by public transport takes over three hours. How much do we value two hours and twenty minutes a day?

Even at minimum wage, that’s worth about $50 to me, which means the fuel may well have to go upwards of $15 a liter to get me out of the car.

This analysis and logic can be applied in various forms to almost any household that does not use hand-to-mouth. A government-funded study in 2007 found that public transport use in New Zealand was less influenced by price than other factors.

Given this, it’s a safe bet that rising fuel costs won’t reduce consumption significantly, and oil companies are unlikely to face a major consumer backlash.

Instead, household resources will be diverted from elastic costs, such as food, to pay for the increased cost of fuel. High-end cafes serving households without word of mouth may feel a slight thrill as a red line is reluctantly drawn across the daily afternoon latte.

However, food banks that are already supporting households on a day-to-day basis will likely see a much more drastic effect as they are called upon to bridge the increasingly impassable gap between non-discretionary spending and minimum income within these struggling communities. .

It is a crisis, whatever the Prime Minister says.


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