Changing Oil Consumption Habits: Fuel Efficiency in Light Vehicles

I recently highlighted grounds for pessimism about the ease with which the U.S. could significantly change our oil consumption habits. Here I highlight some interesting new research by U.C. Davis economics professor Christopher Knittel which offers a more optimistic assessment.

Knittel's paper notes that although U.S. fuel economy has shown only a modest improvement over the last 30 years, vehicle weight and horsepower have increased substantially. For example, the diagram below shows weight, horsepower, torque, and fuel economy for the Honda Accord since 1980.

Attributes of Honda Accord over time. Top row: weight and horsepower. Bottom row: torque and fuel economy. Source: Knittel (2009).

Knittel argues that manufacturers could produce cars with different combinations of these attributes, and that technological improvement has allowed them to give consumers more of everything. For example, the figure below shows combinations of fuel economy and horsepower offered by different passenger cars. The circles correspond to cars sold in 1980, and the squares to cars sold in 2006. A typical car improved on both dimensions-- the production possibilities set has shifted out over time, with consumer preferences opting to take more of the technological improvement in the form of higher horsepower rather than better fuel economy.

em>Fuel economy versus horsepower for U.S. passenger cars in 1980 and 2006. Source: Knittel (2009).

Knittel estimated an empirical relationship between fuel economy, horsepower, size, torque, and other characteristics such as whether the vehicle uses automatic transmission, based on a panel data set of different models sold over time, allowing the intercept of this relation also to change over time. That changing intercept is a key magnitude of interest, since it captures the extent of overall technological improvement due to features such as more efficient engines and transmissions. Here is what Knittel concludes about the magnitude of the outward shift over time in the production possibilities set:

if weight, horsepower and torque were held at their 1980 levels, fuel economy for both passenger cars and light trucks could have increased by nearly 50 percent from 1980 to 2006; this is in stark contrast to the 15 percent by which fuel economy actually increased.

By. James Hamilton of Econbrowser
Econbrowser analyse current economic conditions and policy.
Reproduced from Econbrowser.com