What if the price of petrol doubled?Posted: November 10, 2010
The accompanying chart, which is based on ABS data, shows the nominal price increased 100% between March 2000 and September 2008. Fortunately it’s dropped back substantially since then. Even so, the current price is still around 80% higher than it was ten or eleven years ago.
It is therefore instructive to look at how drivers responded to this increase in costs.
In part, travellers adjust to higher petrol prices by driving more carefully, driving less and by buying more fuel-efficient cars. While there have been some improvements in this respect, they’re not spectacular. The average fuel consumption of new light vehicles is now around 8 litres per 100 km. Yet the average consumption of the national fleet is still up at 11 litres per 100 km. Moreover, the potential benefits from more fuel-efficient cars are not being fully realised because of increasing consumer demand for larger, more powerful and more luxurious vehicles.
Some travellers respond to higher petrol prices by switching to public transport. Indeed, there was a significant increase in demand for public transport over this period, especially from around 2004-05. However this was from a small base and public transport still only accounts for around 14% of all weekday trips in Sydney and Melbourne.
Like most things, this increase in patronage is very likely the result of a combination of factors. While there seems little doubt that the higher price of petrol is a factor, it is by no means certain it is the most important one.
One reason to question its primacy is that patronage grew at different rates and at different times across Australia’s five major capital cities, even though petrol price increases followed the same basic pattern in each city. Melbourne, for example, had a much larger increase in patronage than Sydney.
There are other factors that might also contribute to higher patronage (see here). They include improvements in public transport as well as increases in traffic congestion, population (including migration), overseas visitors and overseas students. I expect high job growth in the city centre is a very important factor in Melbourne’s case and the main reason why it experienced higher patronage growth than other cities.
The second chart suggests why the large increases in petrol prices haven’t led to wholesale change in travel behaviour. It shows that wages grew at least as fast as the price of petrol. Thus the capacity of motorists to buy fuel has been maintained by higher incomes.
Drivers’ capacity to pay has also been enhanced by large falls in both the nominal and the real cost of buying a car.
The chart indicates that starting around fifteen years ago, the price of new cars decreased significantly relative to the CPI and even more sharply relative to earnings. Thus some of the largest costs of motoring – depreciation and interest charges – have been slashed.
Nevertheless, a future doubling in the pump price of petrol – say to around $2.50 per litre – could potentially be very painful, depending on factors like the speed of increase and the general health of the economy. Its impact would also depend on parallel movements in the CPI.
However while at-risk travellers will always be hit hardest, it might not be the general disaster that is often assumed. And nor might it have as dramatic an effect on car use and public transport demand as is customarily assumed.