Thursday, May 01, 2008
Supply and Demand In Action
Because the only way to cut consumption significantly, short of a move and/or a lifestyle change, is to drive more efficient vehicles, gasoline demand is said to be “price inelastic”. One of the determinants of price inelasticity is the time it takes to change prices. Numbers never mean anything without a frame of reference, and so our frame of reference would be the time to act on changing consumption of gas. Coming up with a new route, carpooling, spending less time driving around, knowing where we're going in the first place, and never driving at rush hour are ways we can adjust the quantity we demand, but as we see, it takes a little while (a week to a month sometimes) for us to adjust these short term measures, especially when some of them, like carpooling or changing your work hours, are harder to change back if the mere gas spike falls.
What if gas prices never again stabilize below $2.00 a gallon? Suppose the new standard price is $2.09? Well, decisions about which new cars to buy will change a bit; rather than anticipate an average price of $1.20 or whatever it was then, we'll realistically expect gas to stay at $2.09, and thus buy more fuel efficient cars. That's not to say everyone will necessarily get a smaller car, as is the case in Britain. But if fuel prices do not decline, automakers will have greater incentive to redesign models with greater fuel efficiency.
The most hillarious line - what if gas prices never stabilize below $2.00 a gallon? We are now starting $3.50 gas in the face, and it'll go up. Price up equals quantity demanded down! Congress doesn't trust the market, but we're already seeing a response.
"Consumer preference is shifting, and we're shifting with it," said Mark LaNeve, GM's vice president of North American sales. Sales of GM's midsize Chevrolet Malibu shot up 40 percent, but the long popular Chevrolet TrailBlazer SUV saw sales dip 73 percent.
Ford Motor Co. said its SUV sales were down 36 percent in April compared with the same month last year. Car sales were down only 1 percent, buoyed by sales of the Ford Focus small car, which saw a 44 percent jump in sales. The Focus gets 24 miles per gallon in the city and 33 on the highway. By comparison, Ford's largest SUV, the Expedition, gets 12 miles per gallon in the city and 18 on the highway, according to federal statistics.
Well who would have thought. Small car good, big car bad. The Focus gets double the gas milage of an Expedition. And that's Ford's biggest SUV now. Remember the Excursion? The one that was bigger than the Suburban? Well, it's dead. Forever.
Now, the last time gas was less than $1.50 a gallon was before the Iraq War. It's about 5 years after that, and at a point where people are transitioning to replacing their old cars. Over the next year in the US, expect a few changes:
- Demand will drop more substantially for gas in the US as more Americans buy smaller, more fuel efficient cars. Prices will continue to rise, though, because the Chinese and Indians will pay more.
- More states will pass laws that have graduated drivers licenses, so teenagers will not drive until they are 17 or 18. This will reduce the number of cars driven by these kids, also reducing demand for fuel. The great thing about this is that teenagers can't vote until they're 18, and it can be excused as a desire for greater public safety.
- People will make grocery lists and visit the express lanes less frequently. It will be less worthwhile to make a trip to the store just for milk.
- Fewer fatalities on the roads, as more people carpool, people use alternate transportation for vacations, and the most dangerous drivers, teenagers and the elderly (who are often on fixed incomes) drive less.
Now let's set the baseline for gas at $3 per gallon, to be optimistic. If you're driving an SUV that gets 15 MPG overall and you drive 20000 miles per year, replacing it with a Ford Escape Hybrid that gets 30 MPG overall, you will save $2000 a year on fuel, and your savings will be greater as the price of fuel goes up. You will save, then, $10,000 on fuel over a five year period on an Escape Hybrid vs a regular SUV, making it a worthwhile move. When you compare smaller cars, you'll notice that a Ford Focus could go for around $16,000 and gets about 27 MPG, while a Toyota Prius gets around 50 MPG. That will save you about $1000 per year, but that may not make up for the price difference in the Prius. The Corolla is even more fuel efficient, making the Prius less desirable, although still potentially worthwhile.
Labels: Department of Big Surprises, Economic Stuff, Politics
