Tuesday, May 23, 2006

When will expensive gas impact living patterns?

Continuing an earlier theme on how high gas prices might affect cities is this piece by Otis White debunking the myth that we're anywhere near high enough prices to change peoples' fundamental behavior (see bold highlight below).

On personal note, I am proud to say our household has joined the realm of transit riders (well, sort of). My wife recently took a job with SAIC/NASA in Clear Lake working on the new Crew Exploration Vehicle, and was not fond of the commute from Meyerland/Bellaire. Not just the 1.5 hour round-trip time and stress, but $9+/day in gas, plus much higher car depreciation expenses (60m/day). Metro buses could work, but require a substantial time-draining transfer downtown that almost double the commute time - and the final leg from the Bay Area Park&Ride to JSC is problematic. Any type of potentially planned commuter rail system would be even worse. But she found the perfectly scheduled 15-seat express vanpool from the West Loop Park&Ride (SW corner of 610) to her exact building at JSC, with a couple quick stops for other NASA contractors along the way from I45 to the campus - all for about $3/workday (less than half of Metro's cost). How's that for a great bargain? It just reinforces that the future of effective commuter transit in multi-nodal Houston is not heavy commuter rail, but a comprehensive managed express (MaX) lane network used by a wide range of very fast, point-to-point bus, van, and carpool options.

On to the Otis White piece, which I continue to post in their entirety until he gets permalinks.

Will Gas Prices Drive People Back to Town?
Don’t Hold Your Breath

Questions: How expensive must gasoline get for people to respond in ways that are meaningful to cities and suburbs? And how long will it take for these things to happen? Answers: Very expensive and a long time.

Oh, some are responding already, taking public transit to work instead of driving. And sales of SUVs, which had been in slow decline in recent years, are now in freefall. But the meaningful changes — exurbanites moving closer to work, people changing jobs to be closer to home, a big and lasting upswing in telecommuting, suburban cities ponying up for commuter rail, dramatic changes in residential development — are years away and dollars more per gallon. And if the price of gas levels off or declines, these changes won’t happen at all.

Why? Because for all the hoo-ha about gasoline crossing the $3 per gallon threshold, it’s still a bargain by historical standards. The peak price was reached in March 1981, when (adjusted for today’s prices) gas cost an average $3.18 a gallon. But even that’s a bit deceptive. Personal income is up in the last 25 years ago. As a result, the Wall Street Journal reported recently, gasoline now makes up just 3 percent of personal spending, down from 5 percent in 1981.

And even if gasoline reached or went beyond 5 percent of personal consumption, it might not provoke a stampede to city townhouses and condos. For one thing, urban housing prices have spiraled out of sight in the past two decades. Unless cities do something about making housing more affordable, many middle-class families can’t afford to move closer to cities. For another, except for their horrible and now more expensive commutes, families in the exurbs are mostly happy there. They’ll make many sacrifices before giving up their homes and children’s schools and soccer teams to move closer. Finally, there’s the experience of the 1980s, when the price of gasoline declined. Why panic because gas is suddenly expensive? Chances are, it’ll decline, most people think.

But surely there’s a point at which gasoline does become so expensive that it causes widespread changes in living patterns. What is it? No one is sure, the Journal reported, but it’s likely to be much, much higher than today’s $3 a gallon. Given the decline of gas spending as a percentage of consumer purchases, one oil economist told the newspaper, “It takes a very big price increase to have a big impact today.”

One measure of that impact is what economists call “price elasticity,” which measures how much the demand for products is affected by price. Turns out, the price of gasoline is very inelastic, meaning that price increases don’t much affect demand. (If a product were perfectly elastic, for every 1 percent price increase, demand would decline 1 percent.) How inelastic is gasoline? Some economists figure it at 0.1, which means that prices would have to increase 10 percent to cause a 1 percent decrease in demand.

Footnote: So if gas in the U.S. is still a bargain by historical standards, where is it expensive? If you’ve driven in Europe, you know. Motorists in Amsterdam pay nearly $6.50 for a standard U.S. gallon of gas. In London they pay about $5.80 a gallon. In Tokyo, about $4.25. On the other hand, gas sells for under $1 in Riyadh, Saudi Arabia, and 12 cents a gallon in Caracas, Venezuela.

8 Comments:

At 9:07 PM, May 23, 2006, Anonymous Steve said...

While I don't have economic research stats to back it up, I personally feel that gas will have to really get to astronomical levels before residential settlement patterns change. It's almost impossible to overstate the desire for the suburban / exurban lifestyle in our culture. First, folks want a big house with a big yard at an affordable price. Second, many want quality school districts. Third, there's many folks - more than we planners / urbanists want to admit - that relish the idea of living as far away from the suburbs and city as possible (these are the folks who are leaving places like Katy and Tomball "because it's too crowded"). Even horrible, 90-minute one-way traffic-clogged commutes aren't enough to dissuade most of these people.

Perhaps the greatest evidence of this is the hundreds of thousands of people leaving high-cost coastal cities - along with their jobs, friends, everything in their life's routine - to move to Phoenix, North Carolina, Texas, etc. expressly so they can afford a large suburban single family home. I mean, if they're willing to go to that length, $3.00 gas is nothing.

 
At 6:41 AM, May 24, 2006, Anonymous Brian S. said...

Small point of contention. Perfectly elastic means that for every increase in price, demand falls to zero. You were looking for Unit Price Elastic.

 
At 7:40 AM, May 24, 2006, Blogger Tory Gattis said...

In addition to lacking permalinks, Otis White doesn't have blog comments - so the only way to tell him that is his email here:
http://www.governing.com/notebio.htm

 
At 1:40 PM, May 25, 2006, Blogger Adam said...

Brian S. is the man! Great catch.

Seems like a good time to put some numbers on this discussion. If you live in town, and now drive half or a quarter as much, you still need a car, so all you saved on is gas, and a small amount of depreciation and maintenance, and a small amount of reduced time in traffic/ time lost to accidents, repairs, etc.

A house may cost as much as 25% to 50% more, and some of the other goods you buy may be more expensive as well.

On top of that, Midtown townhouses and Pearland 3 or 4-bedrooms are not really goods a lot of people are willing to substitute for one another.

So how long before people run to the middle of town? I folks spend 5% of their money on gas, and 25% on housing, and a comprable home in town 33% more:
people who weren't inclined to live in town already would have to expect something like $8 gas in order to feel the need to move because of gas.

Sound about right? If the 3% number is actually correct, then its more like $11 gas. Of course, once they move in, they'll start using less gas, so maybe $6 or $6.50 would be high enough.

---Adam

(At the same time though, if everyone who has to commute moves in to town, the price of suburban housing will probably go down, making it more desirable for a new group of people to try to move out...)

 
At 2:01 PM, May 25, 2006, Blogger Tory Gattis said...

Interesting analysis, although I don't know how the calculus changes once you consider that houses are appreciating assets (rather than pure costs - like cars and gas), and that land in-town appreciates quite a bit more than in the 'burbs. There is still an added cost for being in town (higher interest costs on a larger mortgage), but it may not be as dramatic once everything is taken into account.

 
At 3:03 PM, May 25, 2006, Anonymous RJ said...

houses are appreciating assets

Just a quick comment, but in some of our suburbs - and I'm thinking of the Spring/Klein area where I grew up - there is such a ready supply of new housing that the older stock sometimes even depreciates despite being in good shape/good neighborhoods. Now it doesn't appreciate quite like a car, but it sure doesn't appreciate on a percentage basis like in-town neighborhoods either.

 
At 3:04 PM, May 25, 2006, Anonymous RJ said...

oops

by "now it doesn't appreciate quite like a car" I meant "now it doesn't depreciate quite like a car"...

 
At 7:18 PM, May 25, 2006, Anonymous Brian S. said...

Part of the analysis needs to incorporate all costs, not just the face value of the home. Typically urban construction does't incur MUD taxes which can be in the 0.75% range. (Please correct me if there are impact fees for urban construction).

I believe HISD has slightly lower property tax rates than some suburban school districts. (Again, correct me if I'm wrong).

Harris County vs. Galveston & Brazoria requires no extra windstorm insurance coverage.

Do most urban neighborhoods have much home owner's association fees? I haven't seen many with lakes, pools, tennis courts, etc...

Taking all these things into account I estimated that I could buy $40K more of a house in the city. Not enough to get over my wife's preferences.

My apologies to Tory for mistaking the elasticity oversight.

 

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