Gasoline Demand: Less Inelastic Than Previously Believed

Guess what happened as Gasoline prices soared last week?  We used 4% less than the prior week — with a travel holiday included:

"Americans used 4% less gasoline amid skyrocketing pump prices last week than they did the week before Hurricane Katrina hit, the federal government reported. But whether that indicates consumers have decided to conserve or merely that they couldn’t find all the gasoline they wanted isn’t clear.

The figures came amid signs that Katrina’s effect on the nation’s energy markets will continue to be felt in the weeks and months to come. The Department of Energy’s Energy Information Administration said yesterday that stores of gasoline last week fell below the average range for the period, in a time when refineries are running flat-out to meet demand, after the hurricane knocked out Gulf Coast refineries. Meanwhile, the U.S. Coast Guard said yesterday that 52 energy-production platforms in the Gulf of Mexico were missing and 58 were damaged by the hurricane, nearly double the report of missing or damaged platforms Tuesday.

Following weeks in which U.S. gasoline use stood at more than 9.4 million barrels a day, it fell to about nine million barrels in the week ended last Friday, the EIA reported. Use fell by a similar amount compared with the year-earlier period. However, EIA officials cautioned that one week doesn’t make a long-term trend."

Predictions for U.S. oil-demand growth for the full year were slashed, according to the EIA, "largely due to higher prices."

This data suggests Americans will reduce oil consumption dramatically — but only if there is an explicit cost to it. Don’t be surprised if some of the more observant members of Congress propose a 50 cent gasoline tax. Its anyone’s guess whether the proceeds get earmarked for disaster relief, or for mass transit. But brace yourself, this one may be coming.

Regardless, if the gasoline tax idea gathers momentum, it will have negative repercussions for GM and Ford, but will be a net positive for Honda and Toyota.

My personal view is that the United States dependency on fossil fuels is not a matter of environmental concern, but rather is a national security issue. As long as we are sending 40% of our petrodollars to the Middle East, they will find their way into the bad guys’ hands. That’s reason enough to want to reduce oil consumption.

UPDATE: September 13, 2005, 7:53am

The WSJ (Page 2) suggests exactly what we are discussing today: Using Taxes to Keep Gasoline Prices High Makes Sense to Some   

U.S. Gasoline Use Fell 4% Last Week
THE WALL STREET JOURNAL, September 9, 2005; Page A13,,SB112623039667736175,00.html

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What's been said:

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  1. Thomas Miller commented on Sep 9

    There is no way Congress will pass a 50 cent tax. I don’t care where funds would be earmarked. Every person I talk to about gas prices is outraged and looking for someone to blame. No self respecting political hack is going to risk voter ire at making gas even more expensive. Not with mid term elections comming and the Democrats smelling Republican blood in the water. If anything, they will cut gas taxes before raising them to curry favor with pissed off voters mad about high gas costs.

  2. arkady commented on Sep 9

    Every SUV owner is a sponsor of international terrorism. this is the right way to think about it. engines above 2L are anti-american with GM or without.

    Another side of the story, that a person in the US consumes twice more of oil than a person in Europe. US consumes roughly half of all produced in the world energy while generating only 30% of the world GDP. From this 30% of GDP 60% are services for 400 mil people.

    There is no doubt that people will look for somebody to blame and will eventually find someone.

  3. Barry Ritholtz commented on Sep 9


    Forgive my imprecision.

    The ~40% figure is the percentage of our imported oil that comes from the Middle East.

    Total oil consumption = 58% imported
    25% of the total consumption = Middle Eastern

    Therefore, 43% of our imported oil comes from that region.

  4. M1EK commented on Sep 9

    I have to agree with the commenter who said it’ll never happen, and that’s a shame. It doesn’t help that the internet is full of people repeating the canard that the gas tax is highly regressive (it’s not).

  5. David Andrew Taylor commented on Sep 9

    I wonder how much of that 4% drop was due to the fact that there were shortages from the hurricane, as well as individuals who just couldn’t drive, like everyone from New Orleans. If that were the case, then there would be barely any elasticity.

  6. malcolm commented on Sep 9

    Gas prices rose here in Cincinnati by about 16.5 to 17%. Let’s round down to 16%. If Cincinnati is typical
    then a 4% decline transelates into an elasticity of -.25
    ehich is more inelastic then the demand for cigarettes.
    I opened up Hall and Lieberman and found that the elasticity of demand was estimated at -.20. If goods become more elastically demanded as prices become higher (at least along a linear demand curve) then -.25
    seems fairly reasonable.

  7. larry borsato commented on Sep 9

    Unintended consequences.

    The Big Picture thinks that there may be some elasticity in gasoline demand after all:”Americans used 4% less gasoline amid skyrocketing pump prices last week than they did the week before Hurricane Katrina hit, the federal government reported. But whe…

  8. dude commented on Sep 9

    Gas is inelastic to a point. when it is super cheap, you don’t even think about filling your tank, but as it goes up everyone starts to cut out the non-essential driving, but once people cut out all the non-essential drivinga nd are down to just driving to and from work/daycare/schools/etc, then I suspect we will see the inelasticity everyone thought was there.

  9. Econbrowser commented on Sep 14

    Gasoline demand plummets

    By Monday, oil and gasoline futures prices had given up all of the gain they’d experienced since Katrina. Today we learned that U.S. gasoline demand has plummeted. Both…

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