History says: Yes!
Baby boomers, and those of us who are older, remember the rapid rise of gasoline prices in the 1970s and the long lines at the gas pumps. The rise began after the OPEC petroleum cartel decided in 1973 to reduce overall production. It was given another boost when Iranians revolted and deposed the Shah in 1979.
I have found data on average fuel prices (gasoline and diesel) since 1970 and on average fuel efficiency for cars and small trucks since 1975. These are displayed in a spreadsheet with charts at Auto Fuel Cost and MPG. The charts in Sheet 1 show the price by year in dollars per gallon ($PG) and the fuel efficiency in miles per gallon (MPG). All prices are adjusted for inflation to 2005 dollar equivalents.
(Tip: Open this narrative and the spreadsheet in separate windows, narrow them, and position them side by side. You will be able to read the text and see the charts at the same time.)
A low price of $1.35 per gallon appears in 1972. It jumps to $1.73 in 1974 after the OPEC cutback and peaks at $2.59 in 1981. Then begins a decline into the 1990s that hits bottom at $1.30 in 1998.
(Tip: You can hover over a dot on a chart and read the data values.)
Another steep rise begins in 1999 and tops out at $3.06 in 2008. This rise is more orderly and was the result of gradually expanding world demand. The economic meltdown of 2008 started another downward trend in 2009. The data stops at 2010.
Those of us, who advocate adding a fee to the price of a fossil fuel at its source, based on the quantity of carbon dioxide (CO2) produced when the fuel is burned, look for empirical evidence that this “carbon fee”, that raises the price of the fuel, really does lead to a reduction in that fuel’s consumption.
The data presented here demonstrate that higher auto fuel prices led to higher fuel efficiencies during two periods in our nation’s history. Chart 1A on Sheet 1 shows prices and Chart 1B shows fuel efficiency. Both charts show rises in the 1970s and again in the 2000s, but the efficiency rises lag the price rises. This lag is two years in the 1970s and five years in the 2000s.
In Sheet 2, Chart 2A contains a scatter plot for the fuel efficiency and price in the 1970s, and Chart 2B contains the same for the 2000s. Both show good correlations.
I remember the 1970s. Rising prices caught everyone’s attention. People wanted more fuel efficient cars and quickly. Toyota and other Japanese car makers could provide these cars and Detroit could not. This enabled the Japanese to gain a foothold in the U.S. market. The trendline on Chart 2A shows that the average MPG improvement during this period was 6.0 miles per gallon for each dollar per gallon of fuel price increase.
The price rise in the 2000s was less dramatic and the response was slower and weaker. The average MPG improvement was 2.8 miles per gallon for each dollar of price increase.
A fundamental holding in economics is that a rise in the price of a commodity (material, product, service) tends to reduce the demand for that commodity. Economists use the statistic “price elasticity of demand” to measure this tendency, and define it as the percentage change in demand divided by the percentage change in price.
The commodity analyzed here is auto fuel and the demand is the quantity of fuel consumed. The quantity of fuel consumed is the product of the miles driven and the fractional gallon consumed for each mile. Each is a component of the overall price elasticity of demand, and rising auto fuel prices during the two periods could have affected each component independently.
This analysis, however, deals only with the second component. The fractional gallon consumed per mile (GPM) is the reciprocal of MPG. Our data shows a positive correlation of MPG with $PG, and this corresponds to a negative correlation of GPM with $PG.
Sheet 2 shows the calculations of price elasticity of demand for each period and the results. They are -0.64 for the 1970s price rise and -0.27 for the 2000s price rise. The average of these is -0.46.
Bill Allen 04-04-15 revised