Econometric Models of the Demand for Motor Fuel

Reviews recent studies of the response of motor fuel demand to price changes, develops two methodologies for estimating short-run and long-run demand relationships, presents empirical estimates made with both national time-series and state pooled time-series data, and compares these estimates with those of other recent studies. This report concludes that the first-year elasticity of highway motor fuel use with respect to real price is low — probably between -0.1 and -0.3; however, the long-run elasticity is higher — between -0.60 and -0.85. Higher gasoline prices would cause new-car sales to drop temporarily, but improved new-car fuel efficiency could stimulate sales and offset some of the decline. A 10 percent increase in real gasoline price would cause a 2 to 3 percent decline in long-run automobile ownership. A given percentage increase in fuel efficiency would not cause a commensurate decrease in fuel use. (See also R-1560, R-1562.)