1 Intelligent Well Technology: Status and Opportunities for Developing Marginal Reserves SPE

1 Intelligent Well Technology: Status and Opportunities for Developing Marginal Reserves SPE

DO U.S. HOUSEHOLDS FAVOR HIGH FUEL ECONOMY VEHICLES WHENGASOLINE PRICES INCREASE? A DISCRETE CHOICE ANALYSIS

Valerie J. Karplus, (617) 894-9015,

Ph.D. Candidate, Massachusetts Institute of Technology

Overview

Do households owning multiple vehicles with different on-road efficiencies reallocate usage in response to fuel price fluctuations? Using nationally-representative cross-sectional data on daily household trips from April 2008 to April 2009 from the 2009 National Household Transportation Survey (NHTS), this project investigates the relationship between the price of motor gasoline and household vehicle usage choices, conditional on the number of vehicles owned, the cost savings associated with switching (which scales with differences in vehicle fuel efficiency), and other vehicle attributes. Assuming household fleets are largely fixed, this research explores the relationship between vehicle usage choices and thefluctuations in gasoline prices over the survey period. Initial evidence of switching motivated the application of a discrete choice (fixed-effects logit) model to investigate the impact of vehicle, as well as household and trip, characteristics on vehicle choice by trip. Preliminary results provide strong evidence thatan increase in the price per mile (the interaction of fuel efficiency in gallons per mile with gasoline price)of driving a particular vehicle reduces its likelihood of usage for any particular trip. However income, household size, and vehicle occupancy are shown to offset this propensity to shift to high fuel economy vehicles. This work complements studies that have focused on the relationship between gasoline price and purchases of high fuel economy vehicles (e.g. Klier & Linn, 2008) and the value consumers place on energy efficiency more broadly (e.g. Hausman et al., 1979).

This analysis is organized as follows. Section 2 provides a brief literature review and develops theoretical background related to the household vehicle use response to gasoline price fluctuations. Section 3decribes the data used to investigate the relationship of interest. Section 4 provides preliminary evidence of a response using elasticity estimates of the VMT and fuel use response to gasoline price fluctuations. Section 5 describes the application of a fixed-effects discrete choice model and presents the results. Section 6 offers some conclusions and directions for future work.

Methods

This paper employs econometric methods to estimate the effect of gasoline prices on household vehicle allocation decisions. First, I estimate elasticities of VMT and fuel use with respect to gasoline price, conditional on characteristics of the household fleet.Second, the paper estimates a semi-log robust least squares regression to determine how proportional changes in fuel price affected level changes in the fraction of miles driven in a car for households owning two vehicles (at least one car and either a minivan, SUV, or truck). Third, to investigate the effect at the individual trip level, a conditional (fixed-effects) logit model was developed following a procedure similar to Hausman et al. (1995) to investigate the effect of implicit driving cost (price per mile) on vehicle usage decisions.

Results

First, the paper shows that households owning two or more vehicles with differences in on-road fuel efficiency reduce gasoline use to a greater extent thanthey reduce vehicle-miles travelled when gasoline prices rise, by comparing the short-run short run price elasticities for both gasoline use and VMT.

Second, results of the robust semi-log least-squares regression indicate a positive relationship between the share of miles-driven in higher fuel efficiency vehicles and proportional changes in gasoline price. In the case of two-vehicle households owning one car and a second vehicle that was either a minivan, SUV, or truck, the measured increase was significantly different from zero for households owning a car and an SUV, but not significant in the case of households owning a car and a minivan or a car and a truck.

Third, analysis using the conditional (fixed-effects) logit model finds that price per mile of each vehicle option had a highly significant and negative effect on household vehicle choice for any given trip. The effect of price per mile on the likelihood of choosing a particular vehicle type (car, minivan, SUV, or truck) is small but the effect is significant at the 1% level. Household size, income, trip length, and vehicle occupancy were shown to be negatively correlated with the choice of high fuel economy vehicles, suggesting important constraints on the household ability or willingness to shift among vehicles.

Conclusions

The results suggest that in the short term, households that own two or more vehicles with different on-road fuel efficiency do shift among these vehicles in response to gasoline price changes. This shifting behaviour appears to be more prevalent for households owning two vehicles that are close substitutes, such as a car and SUV. Households owning one car and either a minivan or truck may purchase the second vehicle to fulfil a specific need and as a result have lower propensity to shift usage. The results of this analysis show that households vary in terms of their willingness and ability to shift vehicle use, which has important implications for gasoline demand forecasting. This diversity may be also an important factor in household-level calculations of short-run welfare loss as a result of fuel price increases (or new fuel taxes).

References

Klier, T. & Linn, J. (2008). The price of gasoline and the demand for fuel efficiency: Evidence from monthly new vehicle sales data. FRB of Chicago Working Paper No. 2009-15. Chicago, IL: Federal Reserve Bank of Chicago.

Hausman, J.A., Leonard, G.K., & McFadden, D. (1995). A utility-consistent, combined discrete choice and count data model: Assessing recreational use losses due to natural resource damage. Journal of Public Economics, 56, 1-30.

Hausman, J.A. (1979). Individual discount rats and the purchase and utilization of energy-using durables. The Bell Journal of Economics, 10(1), 33-54.

Bento, A.M., Goulder, L.H., Jacobsen, M.R., & von Haefen, R.H. (2009). Distributional and efficiency impacts of increased gasoline taxes. American Economic Review, 99(3), 1-37.