It is widely asserted that high gasoline prices are evidence of some sort of market failure justifying government regulation, such as tightened fuel economy standards for motor vehicles that would reduce oil consumption. AP and others are reporting that both Congress and the Administration are heading in this direction, and 10 state attorney’s general today announced that they are suing the federal government, challenging its April 6, 2006 final rule on fuel efficiency standards for light trucks. But consumers seem to be responding to high prices without any governmental help–by purchasing fewer low-mileage SUVs.
In the short run, drivers cannot easily reduce their gasoline consumption, but in the long run they can–by moving closer to work, changing jobs so that work is closer to home, or by purchasing more fuel-efficient vehicles. Replacing a vehicle is by far the easiest of these adaptations. However obvious this might seem, newspaper editors often seem not to get it. For example, the sensible May 1 Wall Street Journal story by Jeffrey Ball we discussed in an earlier post has been retitled in the Journal’s search utility (subscriptions required) “U.S. Gas Prices Haven’t Cut Consumption,” as if that were news at all, much less worthy of placement on Page One.
New York Times reporter Jeremy W. Peters says there is now a “glut” of SUVs on the market. Motor vehicle sales data collected by Autodata Corp. and reported by the Journal show that trucks and SUVs sold poorly in April compared to first quarter sales generally. Overall vehicle sales in April 2006 were down 4% from sales in April 2005, with cars off 1% and trucks off 7%. These data are summarized below disaggregated by manufacturer.
These results occurred despite the U.S. economy growing at a 4.8% annual rate in the first quarter, but they should be expected given the recent run-up in gasoline prices. More importantly for regulatory purposes, it means that motor vehicle manufacturers had supplied the market with products that vary significantly in fuel economy, as well as many other attributes consumers value, and consumers responded as expected by trading off these other amenities for higher fuel economy.
If gasoline prices remain high, consumers at the margin will continue to prefer higher mileage vehicles and the fuel economy of the U.S. fleet will increase on its own without any government intervention. But if gasoline prices experience a sustained decline, consumers will lose interest in higher fuel economy and resume purchasing vehicles that have these other valued attributes and lower fuel economy. Those who believe the U.S. vehicle fleet ought to get significantly better gas mileage should be applauding high gas prices because that’s the fastest way to achieve their policy objectives.
At best, tightening fuel economy standards will take much longer to affect the fuel economy of the U.S. fleet. It is rational for manufacturers to delay fuel economy improvements because of uncertainty about what the new standards might be and how compliance will be measured. Any new standards that actually “bite” will create a mismatch between what consumers want and what manufacturers are allowed to make. Consumers will blame manufacturers for offering cars they don’t like, even though it will have been the result of government policy.
|% Change April Sales
2005 to 2006
|% Change Q1 Sales