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James Hamilton

James Hamilton

James is the Editor of Econbrowser – a popular economics blog that Analyses current economic conditions and policy.

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Reducing Petroleum Consumption from Transportation

MIT Professor Christopher Knittel has a new paper on the potential for the United States to reduce petroleum consumption.

From the paper's abstract:

The United States consumed more petroleum-based liquid fuel per capita than any other OECD-high-income country-- 30 percent more than the second-highest country (Canada) and 40 percent more than the third-highest (Luxemburg). This paper examines the main channels through which reductions in U.S. oil consumption might take place: (a) increased fuel economy of existing vehicles, (b) increased use of non-petroleum-based low-carbon fuels, (c) alternatives to the internal combustion engine, and (d) reduced vehicles miles travelled. I then discuss how the policies for reducing petroleum consumption used in the US compare with the standard economics prescription for using a Pigouvian tax to deal with externalities. Taking into account that energy taxes are a political hot button in the United States, and also considering some evidence that consumers may not correctly value fuel economy, I offer some thoughts about the margins on which policy aimed at reducing petroleum consumption would have the largest impact on economic efficiency.

Knittel begins by noting that fuel taxes differ tremendously across OECD countries.

Motor Fuel Taxes 
Motor fuel taxes (dollars per gallon) in different countries as of Jan 1, 2010. Source: Knittel (2012).


And these differences in taxes are associated with huge differences in per capita consumption. The graph below shows a pretty strong correlation: countries with lower fuel prices have higher fuel consumption. The slope of the fitted curve raises the possibility that, given time, long-run responses to higher gasoline prices could be substantially stronger than time-series correlations might suggest.

Consumption of Transportation Fuel per Person
Vertical axis: consumption of transportation fuel per person. Horizontal axis: gasoline price. Source: Knittel (2012).

 Knittel feels that while raising gasoline taxes may be politically infeasible for the U.S., corporate average fuel economy (CAFE) standards are a reasonable alternative. Current standards call for an average fuel economy of 34 miles per gallon by 2016 and 54.5 by 2025. One of the reasons Knittel thinks these may be attainable is his earlier research (which we called to the attention of Econbrowser readers last year) showing that historically, technological improvements have gone more toward increasing weight and horsepower than to fuel efficiency. He thinks those CAFE standards could be attained by a combination of further technological improvements, modest reductions in size and horsepower, and more electric and hybrid vehicles.

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

As U.S. oil consumption continued to increase during the oil price run-up over 2003-2007, I became pessimistic about how hard it would be to make adjustments in the quantity consumed, and indeed Knittel himself produced some earlier research consistent with that conclusion. However, the more recent data do suggest Americans have started to make some significant adjustments.

Average US Petroluem Products SUpplied in Last 12 Weeks
U.S. petroleum products supplied, average of most recent 12 weeks, in millions of barrels per day, Jan 25, 1991 to Dec 30, 2011. Data source:
EIA.

By. James Hamilton

Reproduced from Econbrowser


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