The price of mobility

The price of mobility

Are rising fuel prices changing the way we live?

When I was in Rome Italy recently gas prices here were roughly $6 a gallon and many of the cars on roads look like two-door golf carts. As far back as 1976, Italians were paying equally high prices: $1.69 per gallon, which in today's dollars equals $6.54.

In the U.S., our favorite vehicle is the Ford F- pickup truck, and our gas currently is nudging $4 a gallon. So it might be time to start figuring out what lessons Americans can learn from the European experience and where our energy needs might lead us.

If gas prices remain high, for whatever reason — "Peak Oil" or political turmoil in the Middle East or simply rising demand for gasoline in India and China and the rest of the growing LDC economies — then we can expect to see our households adapt along a variety of dimensions.

For instance, like the Italians, some people (especially the young, older households, and those who work in the center cities) will increasingly live an urban life, occupying high density apartment buildings close to public transit and walking to stores. The lifestyle Manhattanites take for granted is "foreign" to many Americans, but some will find it increasingly attractive.

Despite this move toward increased density, many of us are set up to live and work in the suburbs. Even Google's, Apple's, and Microsoft's main campuses are all in the suburbs. These are not public-transit-friendly destinations. If gas prices remain high, how will households who live and work in the suburbs cope? Many suburban households own more than one car. After being burned by the 2008 oil price shocks, households have learned that price spikes are a reality and they have had three years to plan out their vehicle portfolio. Households who have purchased a high MPG vehicle have the luxury of using it more during high gas price times. Such nimbleness lowers annual gasoline expenditure.

Suppose that gas rises to $5 per gallon (not an unlikely scenario) and a household drives 15,000 miles per year — which is close to the U.S. national average. If their current vehicle achieves 25 MPG, then their annual gasoline bill equals $3000. If they buy a hybrid that doubles their gas mileage to 50 MPG their bill will shrink to $1,500. This arithmetic highlights that higher gasoline prices will translate into an increased demand for green vehicles.

The stock market anticipates this. In preliminary new research on the determinants of the "green economy," I have collected data  on dozens of publicly traded "green companies," including Tesla. Using standard statistical methods, I have documented that when gas prices are rising, such companies enjoy an abnormally high increase in their stock price. One intuitive explanation is that stock buyers believe that such green companies are more likely to be a good investment when we're all paying more for gas.

This isn't lost on car manufacturers. As gas prices rise, they'll invest more time and effort producing more fuel efficient vehicles. We've already seen the advent of any number of hybrid and electric vehicles from Nissan, Toyota, Tesla, and Chevrolet. In their pursuit of profit, such companies will recognize that demand for electric vehicles will increase and that the company that can produce a viable alternative vehicle can earn billions.

We've seen this dynamic in other industries. When electricity prices rise, companies produce air conditioners that are more energy efficient. That is, companies respond to operating cost incentives and economize on resources that have become more expensive.

Looking back out at the streets of Rome, while it's certainly true that the Italian golf carts really aren't all that sexy, a universal adoption of such scaled down private vehicles would increase street safety. In preliminary research, two UC Berkeley economists have documented  that heavier vehicles — the kind favored by Americans — are safer for their own occupants but more hazardous for the occupants of other vehicles. They estimate that being hit by a vehicle that is 1,000 pounds heavier results in a 49% increase in the baseline fatality probability. Higher gasoline prices will help to call off this arms race.

So while $4 gasoline is a scary proposition, it also offers safer roads, lower climate impact, and a happy Tom Friedman. As Meatloaf would say, "Two out of three ain’t bad.”

Matthew E. Kahn is a Professor at UCLA's Institute of the Environment, the Department of Economics and the Department of Public Policy. His latest book isClimatopolis: How Our Cities Will Thrive in the Hotter World.

This blog was originally published on www.HBR.org Monday March 14, 2011 titled Celebrating $4 Gas.

Comments
I think this is really funny as I have experienced this myself. A few summers back, Chicago hit 4.50 in a time when gas everywhere else was 3.00. My mom let the car sitthe entire summer. We biked, walked, ran, used the CTA, anything but the car. As soon as prices came back down to more normal levels, everything went back to normal. Now with gas at around 4.70 at our local pump, it's like a repeat of the last few summers. Being in chicago we're lucky that we have the CTA, but in cities like LA something's going to have to give, and I think smart cars will be the next big thing.
Interesting perspective.
Of course, this may change according to geographies, but perhaps rising prices are an efficient way of convincing people to change transportation habits and companies to change investment priorities.
In Brazil, gas rising prices and parking difficulties has been a major incentive to adopt a transport routine to many upper social class who live in the city centers. However they are fair lees convincing to lower social classes. Most of whom have always lived in suburban and as the nation’s economy boom and credit access increases, they do not disregard the opportunity to buy a car.
So over here it is important that these “negative” incentives come together with “positive” ones, such as improving public transport system and even working to improve the image of the transport system as whole.

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