Focus on Demand as Gasoline Prices Rise

HOUSTON – It may be fashionable for U.S. motorists to gripe about gasoline prices, but economists Friday said history has shown they'll probably frown and bear it rather than slash fuel use.

Other consumption could be fair game, however.

"People are shifting expenditures in order to deal with higher fuel costs, (such as) gasoline substitution for new Nikes," said Michelle Michot Foss, chief energy economist and head of the Center for Energy Economics at the University of Texas (search) at Austin.

"This ... can't go on too longer before the broader economic effects are felt — lower retail sales, less demand for credils you haven't seen before," said Michael Burdette, an Energy Information Administration (search) analyst.

The average U.S. retail price of regular unleaded gasoline was $2.60 per gallon, according to a survey by AAA (search) released Friday, which said the record was set Monday at $2.61.

Still, while the sheer figures are the highest ever, the EIA says it remains 50 cents below the inflation-adjusted high of $3.10 in 1981, based on today's dollars.

Throw in changes in gas mileage, driving habits and relative personal income, and EIA forecaster Dave Costello said the nominal price might have to rise well beyond $3.10 to match the price headaches of a quarter-century ago.

Further, 2005 America lives with a cheaper dollar and lower interest rates than existed in the late 1970s and early 1980s, making life away from the filling station less expensive.

"I have no idea, nor do I think anyone else has a very good idea, of how high prices need to go for the effects to be stronger," Foss said.

While the demand reaction hasn't matched the drama of the price run-up, Costello said there already have been ripples.

"Gasoline demand growth for the year to date is well under 1 percent, and normal growth is 2 percent," Costello said. "It's not as if elasticity has gone to zero."

Elasticity — the ability of one side of the supply-demand curve to react to the other — is considered low when it comes to gasoline usage. Unlike other goods and services, motor fuel is in constant demand regardless of price.

"Most of the driving we do is not all that discretionary," Costello said. "You've got to get to work, you've been planning that vacation for a year. But at the margin, people will change, and in bits and pieces, here and there, people have stopped driving as much as they would have."

For instance, a family with a small sedan and a sport-utility vehicle still might take that weekend outing, but might decide to squeeze into the smaller vehicle to save fuel.

However, a June report by the Federal Trade Commission (search) found that gasoline demand does not have much wiggle room, whether in the face of short- or long-term price hikes.

"The relative inflexibility of consumer demand for gasoline makes consumers more vulnerable to substantial gasoline price increases," the report concluded.