The great gas mystery: Higher prices, but continued growth

Prices are up at the pump, but the economy is also growing and we're driving less. You can thank your smartphone

Topics: Gas Prices, U.S. Economy,

The great gas mystery: Higher prices, but continued growth (Credit: pio3 via Shutterstock/Salon)

It’s a number that makes average Americans wince and incumbent presidents reach for the Xanax: The average national price of a gallon of gas is $3.87, just 24 cents below its all-time high. A recent McClatchy-Marist poll found that three-quarters of Americans believe higher gas prices put “a moderate or great deal of strain on their family budget.” And you don’t have to pay more than cursory attention to the presidential campaign to see that Republicans are convinced that pain at the pump equals pain for the White House.

As one might assume after a year of rising gas prices, Americans are driving fewer miles and consuming less gasoline. Historically speaking, that kind of trend line is bad news, sending economy-watchers scrambling to sound the recession klaxon warning bell. Americans are generally unwilling or unable to cut back on their car-centered lifestyles, so when they do, it usually means that they have no other choice, because the economy is cratering.

But there’s a mystery here, because the economy is not cratering (at least not yet). Thursday’s release of the final government estimate for the rate of economic growth during the fourth quarter of 2011 held steady at a reasonably healthy 3 percent (and a look inside the numbers is unexpectedly even more encouraging). The economy has added almost three-quarters of a million jobs in the last three months, and jobless claim numbers for March, which continue to average at a four-year low, suggest another good labor report waits in the wings next week.

Americans are driving as if every freeway exit ramp leads straight into recession, but the available data on the overall economy practically qualify as rosy. From the White House to your wallet, brows are furrowed. The normal rules of economic reality don’t get repealed all that often. What’s going on?

The answer is complicated and tentative. Numerous factors are in play. They include higher fuel efficiency, thrifty habits inculcated during the Great Recession and demographic changes (for example, fewer baby boomers toting their kids to and from school). But there’s also a potential wild card. Young people aren’t driving anywhere near as much as previous generations did.

And why should they? If you’ve got a smartphone and a Facebook account, who needs to leave home?

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If there is anything economists think they know about gasoline demand today, it’s that it’s supposed to be “inelastic,” a characteristic that differentiates it from demand for typical goods and services. Normally, if the price of something goes up, demand falls — that’s the definition of “elasticity,” in econo-speak. But that’s not true for gasoline, for reasons that have always seemed obvious: No matter what the price, Americans still need to get to work, pick up their kids from school, go to the grocery store and so on.

It wasn’t always this way. Back in the days of the big oil shocks of the 1970s, there was still a lot of slack in the system. Americans reacted to huge price hikes by dramatically changing their consumption habits. But over recent decades, as documented by three researchers at the University of California at Davis in a paper released last year, the pattern started to change. There has been less and less room to maneuver.

The authors cited several reasons for the lack of flexibility, including the rise of suburban development and the decline in availability of public transport. But whatever the ultimate explanation, the conclusion was firm: “Today’s consumers have not significantly altered their driving behavior in response to higher gasoline prices.”

A year later, the equation seems different. Americans are driving fewer miles and consuming much less gas. In 2011, Americans drove around 34 billion fewer miles than in 2010. In January, the four-week average for U.S. gasoline consumption fell to its lowest point since the immediate aftermath of 9/11. In March, a MasterCard study reported that in the most recent 52-week period, “U.S. gasoline consumption dropped by 4.2 billion gallons, or 3 percent, vs. the previous one-year period.”

Improvement in fuel economy explains some of the shift. Over the last four years, the average fuel efficiency of the American auto fleet has risen almost four miles per gallon. But that doesn’t explain the change in miles driven.

Could it be that young people — especially those so-called millennials — just don’t like to drive?

We know that Americans under 40 are driving much less than their older cohorts, according to data from the National Household Travel Survey. But the younger we are, the more pronounced our disdain becomes. The New York Times reported last week some very interesting numbers, and posited a provocative explanation.

In 2008, 46.3 percent of potential drivers 19 years old and younger had driver’s licenses, compared with 64.4 percent in 1998, according to the Federal Highway Administration, and drivers ages 21 to 30 drove 12 percent fewer miles in 2009 than they did in 1995.

Forty-six percent of drivers aged 18 to 24 said they would choose Internet access over owning a car, according to the research firm Gartner.

Never mind gas prices! The Internet has already reshaped the music business and is strangling print publications by the throat. Now it’s going after the automobile?

A survey conducted two years ago by J.D. Power and Associates lends further support:

According to Mike Cooperman, director of marketing for Power’s web intelligence division, “The most interesting conclusion we came to is that millennials don’t talk about cars the way previous generations did. It used to be that when you turned 16 you went down to the DMV and got your license, but young people care more about their cell phones than they do their cars.”

Part of the reason for this, Cooperman said, is that young people use Facebook, Twitter and IM messages to stay in touch, so physical proximity doesn’t matter as much as it used to. Cell phones and PDAs mean that everyone they know is connected. “Teens feel less of a need to physically congregate,” the study says, “and less of a need for a mode of transportation.”

We can throw other factors into the mix too. So-called millennials may be more concerned with the environment and the threat of destructive climate change. They also may be more willing to experiment with car-sharing services. And in general, consumers of all ages are choosing to buy products online rather than at the mall.

I asked Dan Sperling, one of the authors of the U.C. Davis report on gasoline demand inelasticity, whether new data contravened the thesis he and his co-authors had put forth. He wasn’t convinced, but he did acknowledge that the demographic changes are significant — including those visible in his own home.

“My anecdotal impressions about young people’s behavior (including my 21-year-old daughter) — smartphones and social media having more status than cars — is supported by the aggregate data on their driver’s licenses and car ownership,” said Sperling.

So what does this mean for the overall health of the U.S. economy? Maybe, just maybe, we can worry a little less about high gas prices stabbing a dagger in the heart of the ongoing recovery. There are fundamental changes occurring in the decades-long love affair between Americans and their cars, and millennials are leading the way. If that reduces our dependence on foreign oil and cuts back on greenhouse gas emissions, all the better.

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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