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Posts tagged “petroleum”

By James Hamilton on Feb 16, 2012 with 5 responses

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 traveled. 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 (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.