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YOU DECIDE: Will our driving habits permanently change?

June 13, 2008

MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

Dr. Mike Walden
Media representatives: For a black-and-white or color copy of this photo, call 919.513.3127 or e-mail dave_caldwell@ncsu.edu.

Change is hard.

For instance, as I near my 60th year of life, I find it harder to alter my habits. Some might say I'm stuck in my ways.

The same might be said of the American driver.

We've gotten used to driving when we please, where we please and driving the vehicle that best suits our needs. Even as gas prices steadily rose this decade, collectively we continued to drive more miles.

Until now.

With gas prices at $4 a gallon, we're actually driving less and buying less gas. One estimate indicates we're using almost 3 million gallons less daily of gasoline this year compared to last year. We're also changing what kinds of vehicles we buy. Hybrid vehicles are selling at a premium, whereas SUV sales are off 25 percent from last year.

What's happening is that drivers are responding to one of the oldest and most prominent of economic concepts, the "law of demand." This "law" (so-called because economists think it is so powerful) simply says consumers will buy more of something when the price of that something falls, and they will buy less of it when its price rises.

So it makes sense that driving and gas consumption have dropped as gas prices have soared.

But why didn't these changes happen earlier? Why didn't we drive less when gas first went from $1 to $2 a gallon, and then from $2 to $3 a gallon?

There are two answers: It takes time for driving habits to change. Most of us are locked in to our commute to work, our shopping routine or taking the kids to school. It takes time to consider and make changes to these habits, but every nickel that gas prices edge higher gives more urgency to altering our driving patterns.

The second answer has to do with our income.

As long as average household incomes were rising this decade, many drivers simply gritted their teeth and paid more for gas. But now, with the economy either in a recession or on the brink of one, income gains have stalled. Households are therefore scrapping to find ways to cut back, and an obvious way is to reduce driving.

Of course, many people applaud the reduction in driving and the decline in gasoline consumption for other than pocketbook reasons. They believe driving less will help the environment, and buying less gas will reduce our dependence on foreign oil.

Yet what if oil and gas prices someday decline?

"Never happen," you might answer. But some really smart people are now saying this is exactly what could happen. They think an "oil price bubble" has developed - just like the tech stock bubble last decade and the housing price bubble this decade - which, when popped, will send oil and gas prices plunging.

If this should happen, the law of demand suggests drivers will begin to drift back to their old ways: driving more, using more gas and buying more trucks and SUVs.

So to make our new driving habits permanent, an idea is beginning to circulate in policy circles that, at first glance, may sound bizarre. This is to institute a "floating national gas tax" that would adjust to always keep the price of gas at a level high enough as to continue to motivate conservation. For example, if this level is $3.75, then whenever the price of gas slipped below it, the tax would automatically increase to keep the pump price at $3.75.

There's a second important part to the idea. Any extra tax revenue from the tax would be rebated to drivers, either directly or indirectly through a reduction in income or payroll taxes.

Isn't this circular reasoning? Won't drivers just take the rebate or tax reduction and use it to buy more gas, defeating the whole purpose of the idea?

Actually, economic research says no. Consumers would spend most of the rebate on other things and would be motivated to continue conserving on driving and gas by the continuing high price of fuel.

High gas prices are changing how we behave, some say for the better. If you're in this camp, then you have to ask, What would happen to these changes if gas prices fell? Is a tax and rebate plan the answer?

You decide!

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University's College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The Department of Communication Services provides his You Decide column every two weeks. Earlier You Decide columns are at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm

Related audio files are at http://www.ncsu.edu/waldenradio/

Posted by Dave at June 13, 2008 08:00 AM