Journal of Transport Economics and Policy, Volume 36, Part 1, January 2002, pp.

126

The Demand for Automobile Fuel

A Survey of Elasticities

Daniel J. Graham and Stephen Glaister

Address for correspondence: Daniel J. Graham, Research Fellow, Department of Civil Engineering, Imperial College of Science, Technology and Medicine, London SW7 2BU. Professor Glaister is also at Imperial College.

Abstract A survey is made of the international research on the response of motorists to fuel price changes and an assessment of the orders of magnitude of the relevant income and price effects. The paper highlights some new results and directions that have appeared in the literature. The evidence shows important differences between the long- and short-run price elasticities of fuel consumption.

Date of receipt of nal manuscript: September 2000

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Introduction
This review is concerned with vehicle fuel demand elasticities. It gathers evidence on responses to fuel price changes, reporting empirical evidence from a number of diVerent countries. It looks at the eVect of price on fuel consumption and on motorists demand for road travel, emphasising diVerences that are found between the long- and short-run price elasticities. The paper also reviews estimates of income elasticities of demand for fuel and for car use. The purpose is to provide an up-to-date survey of the international fuel demand literature, giving an assessment of the general magnitude of the relevant elasticities. The paper is not a methodological review. Instead, it focuses on identifying the main themes in the literature and seeks to illustrate some of the new results and directions that have appeared in recent research. Earlier extensive surveys of this literature are now well known (see, for example, Drollas, 1984; Oum, 1989; Dahl and Sterner, 1991a, 1991b; Goodwin, 1992). The most informative of these surveys are noted here to provide a general view about the orders of magnitude of the elasticities relevant to fuel demand. The paper then goes on to draw out some recent work, which by focusing on specic issues or by using innovative data or methodology, has added substantial content to the eld.

Major review articles

Survey articles on the characteristics of fuel demand are noted here in chronological order. In most cases these studies provided new empirical estimates as well as review material. Where this is the case both contributions are reported. By focusing on comprehensive reviews, which collectively cover hundreds of individual studies, this section seeks to arrive at a balanced view of the likely orders of magnitude of fuel demand elasticities. Drollas (1984) provides an early comprehensive review of fuel demand characteristics. He surveys a variety of academic and non-academic studies of gasoline demand elasticities and also provides his own estimates for European countries in the 1980s. The author cites price and income elasticities from previous studies predominantly estimated for the US. His survey spans diVerent modelling techniques including static cross-sectional specications and time-series and pooled cross-section time-series models

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with a variety of lagged structures. While a range of estimates is found in the literature, the consensus view is that the long-run price elasticity of demand is around 0:80, while the long-run income elasticity is slightly below unity. Only some of the studies reviewed by Drollas distinguish short- from long-run eVects. Those that do typically nd short-run price elasticities to be one-third the magnitude of the long run, and short-run income eVects to range from a quarter to a half of the long-run estimate. The review of limited existing evidence on other countries suggests no substantial diVerences from the US. Drollas also provides his own price elasticity estimates for European countries over the period 1950 to 1980. The motivations for his empirical work are to extend the analysis beyond the timeframe of the previous studies he reviews to include the mid 70s oil crisis, to incorporate a wider range of nations, and to implement a vehicle-stock adjustment model that he believes to be well specied yet economical in data requirements. Specically, Drollas estimates a vehicle stock adjustment model in its reduced form without explicit consideration of the vehicle stock itself. He estimates dynamic models in log-linear form that relate gasoline consumption to income, the real price of gasoline, the real price of other transport services, and the price of vehicles. The models are estimated with endogenous and exogenous lags according to geometric and inverted-V lag schemes. The authors results yield long-run price elasticity estimates of approximately 0:6 for the UK, 0:8 to 1:2 for West Germany, 0:6 for France, and 0:8 and 0:9 for Austria. These compare to short-run gures of around 0:26 for the UK, 0:41 and 0:53 for West Germany, 0:44 for France, and 0:34 and 0:42 for Austria. Thus, he nds that while gasoline demand may be inelastic in the short run it is less so in the long run, and these results are consistent with those of the previous studies he reviews. However, Drollas believes his estimates give evidence that the true long-run price elasticities, particularly for European countries, may well be above unity. He attributes these higher than expected long-run elasticities to substitute types of transport fuels (diesel, liqueed petroleum gas), substitute forms of transport, and the fact that consumers can switch expenditure to activities or goods that compete with transport. Other important ndings of this study are that similarity rather than diversity exists between countries in the characteristics of fuel demand, and that inertia in gasoline consumption can be explained by the slowly changing vehicle stock and by the persistence of ine cient habits. Blum et al. (1988) review studies on aggregate time-series gasoline demand models for West Germany and Austria. The authors set out a

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typology of gasoline demand studies based on the formal econometric structure of the models used and provide a commentary on the results obtained. Models are distinguished with respect to the form of the demand function, the treatment of time, the structure of the error component, and the estimation technique. The paper emphasises short-term eVects. The studies they review for Germany and Austria give short-run price and income elasticities over very large ranges, from 0:25 to 0:83 and from 0.86 to 1.90 respectively. The authors express concerns over the demand specications used to estimate these elasticities. They argue that while many previous studies have interesting model characteristics and estimation techniques, they are also typically characterised by diVerent restrictive functional forms, which have given rise to much of the variation between estimates. Blum et al. go on to review some results for Germany by Foos (1986), which examines a much larger number of variables than commonly found in gasoline demand studies, including important exogenous variables such as the level of economic activity, the prices of other goods, weather conditions, and the availability of infrastructure. The data used by Foos are for West Germany and are monthly from January 1968 to December 1983. Fooss results give a short-run price eVect of 0:28 and income eVect of 0.25. The short-run price elasticity is of fairly typical magnitude but the income eVect is smaller than commonly reported. Blum et al. explain this result by pointing out that the model also contains variables reecting the level of economic activity (employment, retail sales, industrial activity): adding the elasticities of these variables to the elasticity of income gives a total elasticity of 1.22. Thus the authors argue that by not explicitly specifying dimensions of the level of economic activity in gasoline demand models, which ultimately generates travel, previous studies have greatly over-estimated the pure income elasticity. Other interesting results reported include the cross-elasticity of gasoline demand with respect to the price of mass transit, estimated at 0.39, and the elasticity of fuel consumption rate of cars, estimated at 0.61. Thus, a 10 per cent increase in fuel e ciency brings about a decrease in fuel consumption of 6.1 per cent: motorists compensate by driving more. The authors also nd that the availability of infrastructure and its quality has an important bearing on fuel demand, although they determine only a small impact from weather conditions. Sterner (1990) examines the pricing and consumption of gasoline in OECD countries. His survey nds long-run price elasticities falling in the interval 0:65 to 1:0 and for income between 1.0 and 1.3. Using data for the OECD between 1962 and 1985 Sterner provides his own set of esti-

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mates. He nds long-run price elasticities of between 1:0 and 1:4 using pooled data. The corresponding income elasticities vary from 0.6 to 1.6. Using time series data the price elasticities are between 0:6 to 1:0, and 1.1 to 1.3 for income. The short-run elasticities for dynamic models appear to be around 0:2 to 0:3 for price, and 0.35 to 0.55 for income. Thus, the treatment of time and the particular methodological approach can have a crucial bearing upon the magnitude of elasticity estimates. Goodwin (1992) explores these issues, updating previous work on gasoline price elasticities in his review of academic and non-academic studies undertaken in the 1980s and 1990s. His paper shows that more recent work has generally revised the magnitude of elasticity estimates upwards. The unweighted mean value of 120 elasticities of gasoline consumption with respect to fuel prices considered in the review is 0:48, compared with similar values from previous reviews of 0:1 to 0:4. Goodwin highlights diVerences between recent studies by categorising estimates of the elasticity of gasoline consumption with respect to fuel price into cross-section or time series, and subdividing this distinction into short-term, long-term, or ambiguous. The short-term period generally refers to less than one year and the ambiguous category refers to estimates obtained from models with no explicit consideration of the time dimension. Goodwins summary of results is reproduced in Table 1. Table 1 Summary of Evidence from Studies of Elasticity of Gasoline Consumption with Respect to Price
Explicit Short term 0:27 (0.18, 51) 0:28 (0.13, 6) Long term 0:71 (0.41, 45) 0:84 (0.18, 8) Ambiguous

Time-series Cross-section

0:53 (0.47, 8) 0:18 (0.10, 5)

Note: Figures in parentheses are standard deviations and the number of quoted elasticities in the average. Source: Goodwin (1992).

The results in Table 1 illustrate the diVerence in magnitude that exists between the short- and long-term eVects of fuel price increases on gasoline consumption. Long-term elasticities tend to be between one-and-a-half and three times higher than the short term. However, having reviewed a wide range of studies, Goodwin also shows that diVerences in methodo-

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logical approach, in this case between time-series and cross-section methods, only marginally aVected the magnitude of the elasticities. The review also considers the eVects of gasoline prices on tra c levels. An earlier paper by Dix and Goodwin (1982) hypothesised that the shortrun elasticities of tra c levels and of gasoline consumption with respect to fuel price would be identical, but that they would diverge over time as the long-run gasoline consumption elasticity grew faster than the tra c elasticity. The reasoning here was that changes in trip rates, car ownership, destination choice, and location decisions would take some time to occur, and that changes in vehicle size and e ciency would have a strong eVect on consumption while preserving mobility. Goodwins evidence of elasticity eVects of tra c levels with respect to fuel prices is shown in Table 2. Table 2 does not support the Dix and Goodwin hypothesis. While it is the case that long-term elasticities are larger than short-term, both short- and long-term eVects of gasoline prices on tra c levels are much less than their eVects on gasoline consumption. Goodwin notes that this is indicative of rapid behavioural responses that aVect gasoline consumption more than tra c. He suggests that they may be due to changes in driving style or speed, or by modifying the least energy-e cient journeys. If this is true, then it would seem that gasoline price manipulation might be a more eVective tool where the objective is to decrease fuel consumption rather than to reduce road congestion.

Table 2 Summary of Evidence from Studies of Elasticity of Tra c with Respect to Price
Explicit Short term 0:16 (0.08, 4) Long term 0:33 (0.11, 4) 0:29 (0.06, 2) Ambiguous

Time-series Cross-section

0:46 (0.40, 5) 0:5 (N/A., 1)

Note: Figures in parentheses are standard deviations and the number of quoted elasticities in the average. Source: Goodwin (1992)

With respect to the time eVect in the magnitude of elasticities Goodwin draws three important conclusions. First, behavioural responses to cost changes take place over time and this implies that time-independent esti-

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mates are subject to error. Second, the range of responses considered credible has to be extended to include changes in car ownership, vehicle type, location decisions, and the use of public transport. Third, policy options are wider than perceived by earlier studies and pricing has a powerful cumulative eVect on the pattern of travel demand. Sterner et al. (1992) examine the price sensitivity of transport gasoline demand. They report results from earlier surveys (Dahl and Sterner 1991a, 1991b), which stratify a wide variety of previous results by the type of model and data used, and calculated average elasticities for each category. Results from dynamic models for OECD countries over the period 1960 85 show great degrees of diVerence in the short- and long-term magnitude of price and income elasticities. The short-run price elasticity of gasoline demand varies between 0:10 to 0:24 depending on the model estimated. The equivalent long-run gure is between 0:54 and 0:96. Averaging these estimates gives a short-run value of 0:23 and a long-run gure of almost three-and-a-half times as large, 0:77. The average national income short-run elasticity is given as 0.39 and the long-run as 1.17. Sterner et al. note that the indication that the absolute value of the income elasticity is higher than for price suggests that gasoline prices must rise faster than the rate of income growth if gasoline consumption is to be stabilised at existing levels. Sterner et al. present the short- and long-run price and income elasticity estimates generated from lagged endogenous variable models for 20 OECD countries. These gures are shown in Table 3. Given mean standard errors the 95% condence interval for the average short-run eVect is from 0:06 to 0:42, and for long-run 0:21 to 1:37. The long-run income eVect is about 2.8 times as large as the shortrun. Excluding Germany, Spain, and Switzerland, which have extremely low t-ratios, and re-calculating the gures, increases the condence intervals for average price elasticities. For short-run eVects, the condence interval is from 0:12 to 0:42, and for long-run eVects from 0:38 to 1:38. The long-run mean price elasticities for the OECD countries are approximately 3.3 times as large as the short-run eVects. The diVerence in order of magnitude for the UK between the short- and long-run is, however, much greater, with an elasticity of about 4.1 times as large in the long term. Sterner and Dahl (1992) extend the investigation into methodological issues, reviewing a large number of diVerent models that have been developed to explain how gasoline demand is related to price, income, and other variables. They nd that diVerent model specications can give very diVerent estimates, and they compare model results by applying them to the same OECD data set (19601985). Long-run elasticities can be esti-

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Table 3 Price and Income Elasticity Estimates of Gasoline Demand Estimates, OECD Countries, 19601985
Price Elasticities SR 0:25 (0.06) 0:18 (0.03) 0:25 (0.11) 0:36 (0.05) 0:37 (0.06) 0:34 (0.15) 0:36 (0.08) 0:05 (0.07) 0:23 (0.11) 0:21 (0.04) 0:37 (0.13) 0:57 (0.11) 0:43 (0.13) 0:13 (0.07) 0:14 (0.17) 0:30 (0.09) 0.05 (0.16) 0:11 (0.07) 0:05 (0.02) 0:15 (0.03) 0:31 (0.06) 0:24 (0.09) LR 1:07 (0.24) 1:00 (0.15) 0:59 (0.26) 0:71 (0.09) 0:61 (0.10) 1:10 (0.47) 0:70 (0.15) 0:56 (0.82) 1:12 (0.52) 1:62 (0.33) 1:16 (0.40) 2:29 (0.46) 0:90 (0.28) 0:67 (0.34) 0:30 (0.37) 0:37 (0.11) 0.09 (0.28) 0:45 (0.27) 0:18 (0.07) 0:76 (0.17) 0:61 (0.11) 0:79 (0.29) Income Elasticities SR 0.12 (0.09) 0.18 (0.07) 0.51 (0.23) 0.63 (0.19) 0.34 (0.08) 0.39 (0.24) 0.64 (0.23) 0.04 (0.16) 0.41 (0.19) 0.12 (0.14) 0.40 (0.17) 0.14 (0.13) 0.63 (0.20) 0.37 (0.18) 0.96 (0.45) 0.51 (0.30) 0.85 (0.29) 0.36 (0.20) 0.18 (0.07) 0.15 (0.01) 0.65 (0.16) 0.41 (0.18) LR 0.53 (0.40) 1.00 (0.38) 1.19 (0.54) 1.25 (0.39) 0.71 (0.17) 1.26 (0.76) 1.23 (0.43) 0.48 (1.92) 2.03 (0.93) 0.93 (1.06) 1.25 (0.52) 0.57 (0.52) 1.32 (0.42) 1.93 (0.94) 2.08 (0.98) 0.99 (0.59) 1.54 (0.53) 1.47 (0.81) 0.71 (0.29) 0.77 (0.06) 1.29 (0.32) 1.17 (0.62)

Canada US Austria Belgium Denmark Finland France Germany Greece Ireland Italy Netherlands Norway Portugal Spain Sweden Switzerland UK Australia Japan Turkey Mean

Note: Standard errors are given in parentheses. Source: Sterner et al. (1992).

mated with either dynamic models on ordinary time-series data or with static models on cross-section data. The dynamic models give estimated price elasticities within the range 0:80 to 0:95, and income elasticities of between 1.1 and 1.3. Static models for cross-section data give roughly unitary elasticities for both price and income. Sterner and Dahl also note that models using pooled data estimate price elasticities as high as 1:3 or 1:4. Short-run estimates from dynamic models generally fall in the range 0:1 to 0:3 for price and 0.15 and 0.55 for income. Dahl (1995) reviews a number of previous gasoline demand surveys conducted since 1977 and updates this work with evidence from the most recent US studies. Table 4 summarises the results reviewed by Dahl.

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Table 4 Demand Elasticity Estimates Reported by Dahl (1995)

Price Elasticity short run Taylor (1977) 0:1 to 0:5 Bohi (1981) 0:2 Kouris (1983) Bohi & Zimmerman (1984) 0.0 to 0:77 Dahl (1986) 0:29 Dahl & Sterner (1991a,1991b) 0:26 Goodwin (1992) 0:27 Source: Dahl (1995). Income Elasticity

long run short run long run 0:25 to 1:0 0 : 7 1:0 1:09 0.0 to 1:59 0:18 to 1.20 0:34 to 1.35 1:02 0.47 1.38 0:86 0.48 1.21 0:71 to 0:84

The studies reviewed were concerned with price elasticities in the industrialised world and they generally found long-run price elasticities between 0.7 and 1.0 and long-run income elasticity greater than 1.0. Dahl notes that these results suggest that taxes may well be an eVective means of reducing pollution from gasoline use, but to keep use constant fuel prices would have to rise faster than income. Dahl reviews 18 recent studies on gasoline demand from the US to explore how elasticity estimates have changed. For studies based on static models, she nds slightly lower long-run price and income elasticities from studies based on recent data 0:16/0.46) compared to (0:53=1:16) from previous estimates. However, static analyses tend to produce intermediaterun, rather than long-run, price elasticity estimates, and Dahls review of dynamic models shows no substantial reduction in the magnitude of the elasticity estimates. For instance, estimates based on lagged endogenous variable models shows short-/long-run price and income elasticities of 0:19/0:66 and 0.27/0.28, and those based on the inverted V model show long-run price and income eVects of 1:20 and 1.22. Dahl believes on balance that elasticities have become less over time, particularly for income. While previous studies show long-run price and income elasticities of around 0.8 and 1.0, recent studies suggest a price response of around 0.6 and a slightly inelastic income response. The reliability of these results, however, is tempered by the small number of estimates reviewed in Dahls update, and by the predominance of static models. On the basis of the surveys reviewed in this section, which have assimilated many hundreds of studies, there is a clear indication that despite variation in elasticities of fuel demand there are fairly narrow

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ranges within which the values typically fall. Short-term price elasticities tend to be between 0:2 and 0:3, while the long-run eVects typically fall between 0:6 and 0:8. For income, the long-run elasticity is usually estimated as slightly higher than unity (1.1 to 1.3) and the short-run elasticity in the range 0.35 to 0.55. However, while the overwhelming evidence points towards values within these ranges the review articles do not categorically account for the variation in the estimates that exists. The following sections attempt to shed some light on this issue. They draw upon recent studies that have added substantially to our understanding of elasticity estimates by exploring specic themes, or by explicitly setting out to explain the variation in elasticity estimates.

Micro-level Data: Individual and Household Demand Studies

One important issue surrounding gasoline demand elasticity estimates is the analytical diVerences permitted by the use of dissaggregate as opposed aggregate data. Most of the estimates reviewed above, and the vast majority of gasoline demand studies in general, are based on aggregate level data at the country or sub-national level. Thus, these studies consider both commercial and consumer demand. Some authors have recently shown that the use of micro-level data, which reects individual and household behaviour more closely, can add detail to our understanding of the temporal nature of consumer response. Eltony (1993) uses household data to quantify the behavioural responses that give rise to negative price elasticities of demand for gasoline. He estimates household gasoline demand in Canada using pooled time-series and cross-sectional provincial household data. His model recognises three main behavioural responses of households to changes in gasoline prices: drive fewer miles, purchase fewer cars and buy more e cient vehicles. Eltony estimates ve separate equations that attempt to explain: gasoline demand per car; the stock of cars per household; new car sales per household; new car fuel e ciency; and the sales ratio of new cars. Using pooled time-series and cross-section data on the Canadian provinces from 19691988 he estimates short-run gasoline price elasticities per car, holding fuel economy constant, of 0:21, and a short-run income elasticity of 0.15.

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From these estimates Eltony goes on to determine dynamic price elasticities of gasoline demand for Canada by simulating the model over the period 1989 to 2000. He assumes a base case in which real household income, the unemployment rate, the real price of new cars, the interest rate, and the real price of gasoline per gallon in Canada and the US are equal to 1988 values and remain constant for the rest of the time horizon. In an alternative solution to the model the real prices of gasoline in Canada and the US are assumed to increase by 10 per cent. The two model solutions are obtained and the percentage change in gasoline consumption computed. His results for the short term (one year) and the long term (two to ten years) are given in Table 5. Table 5 Dynamic Price Elasticities of Gasoline Demand in Canada
Year 1 2 3 4 5 6 Source: Eltony (1993). 0:3120 0:4673 0:5370 0:5981 0:6984 0:8132 Year 7 8 9 10 11 12 0:8935 0:9478 0:9839 1:0073 1:0192 1:0239

Table 5 demonstrates a number of important points about short-run and long-run eVects of increasing the price of fuel. The short-run dynamic own-price elasticity of gasoline is estimated at 0:31. He nds that almost 75 per cent of household response to price changes in the rst year can be attributed to driving fewer miles. A further 10 per cent results from an alteration in the composition of the eet to more fuel-e cient vehicles, and the remaining 15 per cent can be attributed to changes in the size of the eet. Eltony also nds intermediate term (5-year) price elasticities ranging from 0:689 to 0:709, and the long-term elasticities from 0:975 to 1:059. Table 5 also shows a rapid response to price increases within the rst four years. Eltony also interprets these results as pointing to the importance of improving fuel e ciency as an eVective means of reducing household gasoline consumption. Rouwendal (1996) seeks direct verication of the validity of short-term behavioural responses to fuel price increases using individual consumer data. The author obtained information about fuel use per kilometre driven from the Dutch Private Car Panel, a rotating panel in which car drivers

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participate for three months. Rouwendal seeks to investigate the relationships between fuel use and other recorded information about cars and their drivers in the short run. With respect to cars, he is able to observe weight, cylinder volume, year of construction, and type of fuel. Known driver characteristics include gender, classications of age and income, total number of kilometres driven each year by the main car user, information about business, whether the driver receives compensation for the cost of the car, and, for employed people, the distance between residential and work location. Monthly information about fuel prices in Holland is available. The author presents OLS estimates for specications that are linear in parameters with the logarithm of the number of kilometres driven per litre of fuel as the dependent variable. His results show heavier cars to be less fuel-e cient than others and diesel cars to be more fuel e cient. Gender eVects are not found but age is important with older drivers generally being less fuel-e cient. As regards the gasoline prices, Rouwendal estimates that a 10 per cent increase in fuel price will induce drivers to increase the average distance per litre of fuel by 1.5 per cent. Rouwendal regards this central result as verication of the signicant eVect of gasoline prices on fuel use in the short run. Surprisingly, the income of the main driver is found to be insignicant, although the type of employment is not. Rouwendal points out that this result conicts with the commonly held belief that there are short-run income eVects. It is, however, perhaps consistent with the nding of Blum et al. (1988) that some explicit consideration of economic activity in gasoline demand models substantially reduces the magnitude of the income eVect. Short-term response is also investigated by Hensher et al. (1990) in an earlier study, but in this case with respect to vehicle use and fuel price. The authors develop a model to explain vehicle kilometres per annum for households in the Sydney metropolitan area in terms of a range of vehicle characteristics as well as household price and income attributes. They are able to distinguish elasticities on the basis of household car ownership characteristics. Their data cover the period 1981 to 1982 for 1,172 households. Hensher et al. start from the premise that households face a set of alternative vehicle technologies and select the one that is consistent with the maximisation of the joint utility of vehicle choice and use. Parameter estimates are presented in the absence of selectivity of vehicles, and in the presence of selectivity where that is derived from the non-linear specication of the type choice model. Hensher et al.s results are consistent with Rouwendals ndings on short-term responses. They show a substantial price eVect on vehicle use

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but only small and insignicant eVects from household income in the short term. The estimated short-run price elasticities of vehicle use are 0:26 for 1-vehicle households, 0:33 for 2-vehicle households, and 0:39 for 3vehicle households. However, the authors nd that income is not conrmed as an important empirical inuence on vehicle use, except for 2vehicle households, with an estimated elasticity of 0.14. Puller and Greening (1999) provide a recent example of the use of micro-level data to identify the intricacies of temporal response to shortrun gasoline price changes. They review short-run estimates of price elasticities of gasoline demand from a number of previous studies based on dissagregated household data. A summary of this review is provided in Table 6. Table 6 Estimates of Short-Run Price Elasticities from Studies Based on Household Data
Short Run Price Elasticity Archibald and Gillingham (1980) Greene and Hu (1986) Walls et al. (1993) Greening et al. (1995) Dahl and Sterner (1991a) 0:43 0:5 to 0.6 0:51 0.00 to 0.67 0:52

Puller and Greening examine household adjustment to changes in the real price of gasoline using a panel of US households over nine years. They believe their work diVers from the studies they review in two ways. First, they allow household vehicle stock to change over time and therefore are able to capture long-run adjustments. Second, they decompose demand into a vehicle usage and a vehicle stock component. The authors present a basic demand framework that explains the household demand for gasoline in terms of contemporaneous and lagged real prices of gasoline, the real income of the household, and a vector of household demographic characteristics. Puller and Greening apply a variety of estimation techniques and lagged structures to their data. Using one-year lags, as previous studies have, the short-run price elasticity of gasoline demand is estimated to be around 0:35, a gure they believe to be consistent with estimates from the literature. However, when they use diVerent specications of quarterly lagged prices they estimate a much larger price elasticity of 0:8. This, they

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argue, indicates that the initial immediate response of consumers to a price rise involves a much larger decrease in gasoline consumption compared to the total annual short-run elasticity. This section has looked at how the gasoline demand studies using disaggregated data have been used to shed more light on the temporal nature of behaviour response. The consensus from these studies is that short-term price elasticity eVects do exist and are of the order of magnitude suggested by the main survey articles reviewed above. There is evidence, however, that income eVects are more di cult to determine in the short run using disaggregated data. However, the models used at the micro level tend to be much less restrictive in exogenous variable specication than the aggregate studies and, as Blum et al. (1988) suggest, this may well account for the absence or reduction of the income eVect.

Vehicle Technology and Fuel E ciency

Many recent studies have investigated fuel e ciency and vehicle technology characteristics in gasoline demand models. Typically, the gasoline elasticities studies, and particularly those using aggregate data, have either not explicitly modelled fuel e ciency or have accorded the issue inadequate attention. Interest in the role of fuel e ciency has grown in recent years as researchers try to understand the implications of scal policy for tra c levels, vehicle emissions, and environmental externalities (see, for example, Hall, 1995; Koopman, 1995; Small and Kazimi, 1995; Crawford and Smith, 1995; Eyre, 1997; McCubbin and Delucchi, 1999; Delucchi, 2000). This section draws together some prominent research from the elasticities literature that considers this particular dimension of fuel demand. Baltagi and Gri n (1983) provide an early example of the explicit treatment of fuel e ciency eVects in gasoline demand estimation. They are interested in the magnitude of the price elasticity of demand for gasoline and review earlier studies that show wide variation in the magnitude of price elasticity estimates. For instance, Houthakker et al. (1974), in a study of the US, indicate very low price elasticities of demand ranging from 0:04 to 0:24 using quarterly data for a cross-section of states. Sweeney (1978), on the other hand, using a model that incorporated the e ciency characteristics of the automobile eet, nds a higher long-run price elasticity of 0:73.
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Baltagi and Gri n are unhappy with such a wide range in estimates, believing them to be symptomatic of the methodology and data used. They wish to obtain more consistent estimates and to understand the implications for estimates of the method and data used. Applying eight alternative estimation techniques to pooled cross-section time-series data, they set out to quantify the magnitude of the price elasticity of gasoline demand in OECD countries for the period 1960 to 1978. The model they propose explains gasoline consumption per vehicle by income per capita, gasoline prices, the stock of cars per capita, and a proxy variable reecting the level of vehicle e ciency. Following the application of these diVerent estimation methods Baltagi and Gri n nd that the long-run price elasticity of gasoline demand typically falls within the range 0:6 and 0:9 a range consistent with the orders of magnitude given in most survey articles. However, in contrast to previous studies (Houthakker et al. 1974; Ramsey et al. 1975; Mehta et al., 1978) they nd a slow adaptation rate with the major response being due to the e ciency characteristics of the automobile eet. Approximately 60 per cent of the adjustment to the long-run equilibrium takes place within the rst ve years previous studies had claimed it was almost instantaneous. Thus they nd that adaptations in the gasoline e ciency of the eet and driving conditions require long periods for adjustment. Broader aspects of fuel e ciency are considered by Espey (1996b). She analyses the role of fuel prices, income, government taxation and technological change in inuencing the consumers choice of fuel economy. The study uses an international data set that comprises observations on eight countries: USA, Japan, France, Germany, the UK, Norway, Sweden, and Denmark, between 1975 and 1990. The equation estimated explains the demand for fuel economy (average eet fuel e ciency, km/ litre) by fuel prices, per capita income, an automobile purchase and registration tax index, and a time trend that is thought to reect technological change. Espeys results indicate a price elasticity of fuel economy of around 0.20, but an income elasticity not signicantly diVerent from zero. The time trend in the model is also found to be statistically signicant, implying a 2.8 per cent annual increase in fuel e ciency over time that is not explained by changes in fuel prices and income. The inuence of time declines over time from 5 per cent in 1975 to under 2 per cent by 1990. Espey indicates that the time trend captures a combination of pure technological improvements in fuel economy and the impact of implicit and explicit environmental standards. The elasticity of fuel economy with

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respect to vehicle taxation is estimated at 0.09, and the coe cient on the lagged dependent variable is 0.94, indicating that only 6 per cent of the eVect of a change in fuel prices, income, or vehicle taxation takes place in the rst year. Espey considers the implications of her results for transport policy in the USA. She argues that fuel prices account for around half the diVerences in fuel economy between the US and other countries in her study. There is however, no strong relationship between income and fuel economy. The author also believes that purchase and registration taxation regimes have an important bearing on diVerences in fuel economy. The issue of how fuel e ciency aVects gasoline demand is explored directly by Orasch and Wirl (1997). Their investigation is motivated by a desire to explain the asymmetry of gasoline demand with respect to energy prices. For the US, they note that the dramatic reduction in gasoline prices during 1986 did not have an eVect on demand comparable to the previous price increases of 1974 and 1979/1980. The authors investigate the eVect of technical fuel e ciency on gasoline demand for the UK, France, and Italy. They estimate an energy demand model with e ciency explicitly treated within an asymmetric framework and a second model excluding e ciency. They nd that the explicit consideration of energy e ciency proves less important than previously thought, with little noticeable diVerence in price elasticity eVects. The income elasticities are found to diVer being higher with e ciency included in the model. The authors are sceptical about the importance of technical e ciency to fuel demand. They conclude that energy and environmental taxes are unlikely to give rise to R & D eVorts in e ciency unless they are very high. Otherwise, any response will be modest and come about only through consumer adjustments. Johansson and Schipper (1997) examine aspects of car fuel in relation to decreasing overall travel and increasing fuel e ciency for 12 OECD countries over the period 1973 to 1992: US, UK, Japan, Australia, Germany, France, Italy, The Netherlands, Sweden, Denmark, Norway, and Finland. Their fuel-use data are disaggregated in such a way that it allows them to conduct separate estimations for vehicle stock, mean fuel intensity, and mean annual driving distance. Using a variety of diVerent estimation techniques and models, the authors use their results to obtain estimates for long-run car fuel and travel demand. The results conrm the importance of increasing fuel e ciency in gasoline demand. They calculate a long-run fuel price elasticity of approximately 0:7, in which the largest portion, just under 60 per cent, is due to changes in fuel intensity. The gasoline demand gure is more than double the estimated price elasticity of travel demand. The long-run

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income elasticity of fuel demand is approximately 1.2, almost all due to the number of cars, and is of identical magnitude with respect to travel demand. The fuel e ciency eVect is found to arise from both increased technical e ciency and the imposition of environmental standards. Johansson and Schipper also consider the eVects of diVerent taxation measures on fuel and travel demand. They nd a fuel tax increase will reduce overall long-run fuel consumption much more than an increase in the other car related taxes, for example, taxing car ownership. The focus on fuel e ciency in gasoline demand studies, although yielding some quite diVerent results, does indicate that increasing e ciency is crucial in explaining the long-run price elasticity. Most studies show a slow rate of adaptation, but nonetheless a strong and identiable eVect. An important and consistent implication of these studies is that the impact of fuel price changes has a greater impact on fuel demand and vehicle emissions than on vehicle use and congestion, particularly in the long run.

Non-stationary Data and the Cointegration Technique

The appropriateness of diVerent data types (cross-section, time-series, pooled) and the methodologies applied to each has proved a source of constant debate in gasoline demand research. Many recent studies have expressed concern over the customary treatment of time-series data and particularly the lack of recognition of the non-stationary nature of these data. This has given rise to the widespread use of cointegration techniques that seek to model the non-stationary nature of time-series data explicitly. The use of this method is employed both as a means of distinguishing the short- from the long-run gasoline demand characteristics, and for calculating the speed of adjustment towards the long-run values. The results obtained in this way often give estimates that are outside the range reported in the major reviews. If the dependent and independent variables are trending variables the time-series data are said to be non-stationary, and if there is a long-term relationship between them then they are cointegrated. Then the mean and variance of the time series are non-constant over time and the value of the process at any point depends on the time period itself. The cointegration technique is designed to distinguish the long-run relationship, the manner in which the two variables drift together, from the short-run eVect, the relationship between deviations of the dependent variable from its long-

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run trend, and deviations of the independent variables from their long-run trends. The cointegration method typically follows three basic steps. First, the time series under consideration are examined to determine if the variables are non-stationary. Second, if the variables are found to be non-stationary the cointegration of the variables is investigated. If the variables do indeed possess a long-run relationship the long-run elasticities may be estimated from the cointegrated regression. Third, the short-run elasticities and the rate of adjustment towards the long-run equilibrium can be estimated by means of an Error Correction Model (ECM). Bentzen (1994) estimates short- and long-run elasticities of gasoline demand for Denmark using annual time-series data for the economy covering the period 1948 to 1991. The model estimated explains gasoline consumption per capita by the price of fuel, vehicle stock per capita, and increasing fuel e ciency represented by a time trend. The author nds a stable long-run relationship between the variables in his model and goes on to estimate the error correction model to distinguish short- and long-run eVects. The estimated short-run price elasticity is 0:32 and the long-run, 0:41. The short-run vehicle per capita income elasticity is 0.89 and the long-run 1.04. The short-run price elasticity estimated by Bentzen is of similar magnitude to values reported in other studies. The long-run value, however, is somewhat lower. Besides diVerences in data and models, the author believes that the lower value can be at least partly explained by the particular statistical technique used, with explicit treatment of the non-stationary properties of the variables. Samimi (1995) uses cointegration techniques to examine the short- and long-run characteristics of energy demand in Australias road transport sector. He has quarterly data for the Australian road transport sector from 1980 to 1993. The model estimated has a lagged endogenous structure. The dependent variable is road transport energy demand, which includes gasoline and diesel oil. The independent variables are fuel prices, the lag of road transport energy demand, and road transport output, which is measured as the revenue generated by carrying goods and passengers for hire and reward and provision of other road transport services. The cointegration estimates yield price elasticity estimates of 0:02 in the short run and 0:12 in the long run. The estimated income elasticities are 0.25 in the short-run and 0.48 in the long run. Samimi notes that the long-run income and price elasticities for Australia are of much lower magnitude than found previously. The author explains the diVerence in the long-run price eVect by hypothesising that

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more e cient vehicle technology is built into his long-run estimate. But he also argues that use of diVerent time periods or diVerent econometric specications would yield diVerent estimates, mainly due to changes in market structure. On this basis the author questions the existence of stable price elasticities. Eltony and Al-Mutairi (1995) estimate the demand for gasoline in Kuwait for the period 19701989 using a cointegration and error correction model. The model they estimate, which is identical to that of Bentzen (1994), explains per capita gasoline consumption in Kuwait by the real price of gasoline and real per capita income. Their cointegrated results show a short-run price elasticity estimate of 0:37 and a long-run price elasticity of 0:46. The estimated short- and long-run income elasticities are 0.47 and 0.92 respectively. Again the long-run price elasticities are outside the range typically reported in the literature. Gasoline demand in India is examined by Ramanathan (1999) using a cointegration methodology to analyse long- and short-run behaviour. The model estimated in the paper explains national per capita gasoline consumption (in tonnes) as a function of real per capita GDP and the price of gasoline. Time-series data are used for estimation covering the period 1972/73 to 1993/94. The authors results for India estimate a short-run price elasticity of gasoline demand of 0:21 and a short-run income elasticity of 1.18. The cointegration model indicates that the adjustment of gasoline consumption towards its long-run equilibrium occurs at a relatively slow rate with 28 per cent of the adjustment occurring within the rst year. The long-run price elasticity of demand estimate is 0:32 and the long-run income elasticity estimate is 2.68. Ramanathan thus derives a very high long-run income elasticity and a rather inelastic price eVect. The author believes that the low level of gasoline consumption in India and the gradual increase in economic growth can explain the diVerences between his results and those obtained elsewhere. He concludes that overpricing of gasoline as a policy instrument is unlikely to have an inuential eVect on gasoline demand in India. The cointegration studies of time-series data estimate long-run price elasticities that are often substantially lower than those reported in the major reviews. Researchers adopting this particular technique frequently state that this is due to the application of a more appropriate treatment of the non-stationary nature of time-series data. However, the generality of these results is still open to question because it is not clear why the use of a long time series, regardless of treatment, yields lower price elasticity estimates. Certainly, as is illustrated in the next section, there may be reason

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to believe that price elasticities have grown over time at least partly as a result of increased fuel e ciency, a factor that has often received insu cient attention in many of the cointegration studies.

Meta-analysis of Gasoline Demand Elasticities

Espey (1998) carries out meta-analyses of international gasoline demand elasticities to explain the variation in the magnitude of estimated price and income eVects. This work forms a particularly important and novel contribution to the literature because it examines empirically why variation in estimates exists. Thus while the major reviews identify the variation, Espeys work seeks to explain it. The paper extends and updates earlier work that focused on variation in elasticity estimates of gasoline demand for the United States alone (Espey, 1996a). Espeys study is based on an extensive review of articles published between 1966 and 1997, which gave 277 estimates of long-run price elasticity, 245 estimates of long-run income elasticities, 363 estimates of shortrun price elasticity, and 345 estimates of the short-run income elasticity. The authors analysis provides four models that seek to explain separately variation in the short- and long-run income and price elasticities. The basic hypothesis is that variation in elasticity estimates can be explained by demand specication, data characteristics, environmental characteristics (the level of the data, the setting, time span analysed), and the estimation method. Espeys results indicate that elasticity estimates are sensitive to a number of diVerent aspects of model structure. In terms of price eVects, the inclusion of vehicle ownership and fuel e ciency variables serves to lower estimates of the short-, but not the long-run, price elasticity. Static models tend to produce larger short-run price elasticities and lower longrun price elasticities, indicating that perhaps these models produce intermediate-run elasticities. No diVerences are found for price elasticities across diVerent dynamic specications, and no diVerences in long-run price elasticity estimates among time-series, cross-sectional, and crosssectional-time-series studies. The paper does show, however, that the short-run price elasticity has tended to decrease over time, while the longrun elasticity has tended to grow. The author believes this temporal eVect is due to increased fuel e ciency. As prices rose during the 1970s and people made some initial adjustments in driving habits and bought more fuel e cient vehicles, there were fewer options for further short-run

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responses to price changes. However, as automobile fuel e ciency improved during the late 1970s and early to mid-1980s, long-run responses to fuel price changes were larger than before 1974. (Espey, 1998; 290) As regards income eVects Espeys analysis nds that the inclusion of vehicle ownership and vehicle characteristics substantially inuences results. Models that include some measure of vehicle ownership estimate signicantly lower short- and long-run income elasticities. No statistically signicant diVerences are found for long-run estimates between static and dynamic models, or between diVerent dynamic specications. Nor are any diVerences found for long-run estimates in studies based on cross-sectional, time-series, or cross-sectional-time-series data. Finally, the author nds that the short-run income elasticity has remained fairly constant over time, while there is evidence to show that the long-run elasticity may be declining. The author concludes that the exclusion of vehicle ownership in demand models would be expected to bias results, particularly short-run eVects. The nding that elasticity estimates are changing over time prompts Espey to warn against using elasticity estimates from the 1970s or even 1980s to extrapolate into the future. But the author also argues that in many ways price elasticity estimates are relatively robust, having a fair degree of consistency across data types and across functional forms and estimation techniques.

Conclusions
On one level, our survey shows that there is a range of diVerent views about the magnitude of price elasticity eVects on gasoline consumption and private travel demand. Figure 1 illustrates diVerences in magnitude, showing estimates of long- and short-run price elasticities of gasoline consumption from various studies. These estimates vary greatly both between and within geographical areas of study for long- and short-run elasticities. For instance, long-run price elasticity estimates range from 0:23 in the US to 1:35 in the OECD countries, and within the US itself from 0:23 to 0:8, and within the OECD from 0:75 to 1:35. Shortrun price elasticities range from 0:2 to 0:5. The Figure illustrates the important inuences that particular data and methods of estimation can have on the results obtained. Whether the data used for estimation are cross-section, time-series, or pooled, has an inuence on the magnitude of the estimates obtained. For this reason,

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Figure 1 Petrol Price Elasticities

Various Countr ies Various Countr ies Canada Germany Aust ria France UK OECD OECD OECD OECD OECD US US US -1.6 -1.4 -1.2 -1 -0.8 Short-run -0.6 Long Run -0.4 -0.2 0

discussion of individual gasoline price elasticity estimates has to be based on a clear understanding of the method used and of the empirical context for estimation. But while the use of specic data or methodological approaches can create crucial diVerences in the magnitude of elasticity estimates, the overwhelming evidence from our survey suggests that long-run price elasticities will typically tend to fall in the 0:6 to 0:8 range. This order of magnitude is indicated by those papers we have reviewed that are themselves extensive surveys, and which have considered hundreds of individual estimates across a range of empirical contexts (Drollas, 1984; Sterner, 1990; Goodwin, 1992; Sterner and Dahl, 1992). In many cases authors explicitly claim to nd similarities and not diVerences between countries in the size of long-run price elasticities. Individual studies, which apply a variety of diVerent estimation techniques to the same data (Baltagi and Gri n, 1983; Eltony, 1990) also produce long-run estimates within the same range. These same studies show that short-run price elasticities normally range from 0:2 to 0:3. In other words they tend to be between 2.5 and 3.5 times lower magnitude than the long-run eVects. Again, this is fairly consistent across diVerent empirical environments.

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Thus, concentrating on evidence that has proved to be consistent across studies, we can draw out three central conclusions from our survey of the literature and highlight some of their implications. (i) There are diVerences between the short- and long-run elasticities of fuel consumption with respect to price. Typically, short-term elasticities are in the region of 0:3 and long-term between 0:6 and 0:8. Therefore, it may be right to say that it wont make much diVerence or people will use their cars just the same, but only in the short run. The evidence is clear and remarkably consistent over a wide range of studies in many countries that in the long run there is a signicant response, albeit a less than proportionate one. (ii) Both long- and short-term eVects of gasoline prices on tra c levels tend to be less than their eVects on the volume of fuel burned. The short-term elasticity of tra c with respect to price is about 0:15 and long-term about 0:30. So motorists do nd ways of economising on their use of fuel, given time to adjust. Raising fuel prices will therefore be more eVective in reducing the quantity of fuel used than in reducing the volume of tra c. (iii) The demand for owning cars in heavily dependent on income. The long-run income elasticity of fuel demand is typically found to fall in the range 1.1 to 1.3. Short-run income elasticities are between just below one-third and just above one-sixth in magnitude: elasticities normally estimated in the range 0.35 to 0.55. The implication is that fuel prices must rise faster than the rate of income growth, even to stabilise consumption at existing levels.

References
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