Americans Driving Less Already

According to this report from the Department of Transportation, Americans have cut down their driving by 4.3% (11 billion miles) in March 2008 compared to March 2007. I assume the cutback is largely a response to record high gas prices. Many economists assume the demand for gas to be price-inelastic since gas is a necessity and there are few immediate alternatives to the usage of gas. However, in a country like the US where people drive excessively and consume gas with little guilt or cost, there was room for people's consumption of gas to respond to its price.

Since the price of gas has gone up by some 70 cents for a gallon from March until June 2008, I assume there is a sustained reduction in the consumption of gas which will continue so long as gas prices keep their upward swing.

The fact that gas prices have gone up so much despite a cutback in consumption in the US is a clear indication that the price hikes are independent of supply-demand in the US. It probably has more to do with the much-discussed demand in emerging markets.

I wanted to figure out how much people in the US saved through their cutbacks. Assuming an average car gives 20 MPG and that the national average cost of gas in March 2008 was about $3.20/gallon, people would have saved $1.8 billion.

What about the price elasticity of gasoline on the basis of this data?

%Change in the consumption of gas in March 2007 compared to March 2008 = 4.3
%Change in the price of gas from March 2007 to March 2008 = (3.30-2.60)/2.60*100 = 26.9

The price elasticity of demand is thus 4.3/26.9 = 0.16, which is considered fairly inelastic. Anyway, it is a more significant response than I expected.

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