What if the price of petrol doubled?

One clue to the likely consequence of a major hike in the price of petrol is provided by the recent past. As it happens, the price almost doubled within the last ten years.

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.

(Department of Transport, Vic)

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.

10 Comments on “What if the price of petrol doubled?”

  1. Michael says:

    Interesting post. I find the trends towards higher energy consumption interesting. Improved fuel efficiency in engines have enabled bigger and faster cars in Australia. I wonder if this trend has manifested itself in every country? It is easy to see why it has occurred here. Bigger, more powerful cars are symptomatic of a general rise in self-centeredness and why not indulge when all the negative externalities are paid by others. I also wonder how much subsidy the car industry receives globally. It is pretty obvious that without assistance holden and ford wouldn’t be making their overpowered boganmobiles in Australia.

  2. chris says:

    In the 1980s, the economists Daniel Khazzoom and Leonard Brookes independently put forward ideas about energy consumption and behavior that argue that increased energy efficiency paradoxically tends to lead to increased energy consumption.

    George Monbiot wrote:
    “Greater efficiency has been used to enhance the engine’s performance, to carry more weight, to power more gadgets. We exchange our light bulbs for less hungry models, then buy a flatscreen TV almost as wide as the house.

    “The environmental activist George Marshall has a term for this behaviour: “reactive denial”. It is as if, by enhancing our consumption of energy even as we become more aware of the dangers of climate change and peak oil, we are persuading ourselves that these problems cannot be real ones. If they were, surely someone would stop us?”

    To get more people out of cars it seems we don’t just need to make public transport bigger and faster, we must also make roads slower and narrower.

    • Alan Davies says:

      “To get more people out of cars it seems we don’t just need to make public transport bigger and faster, we must also make roads slower and narrower”

      Precisely. Public transport won’t capture a significant share of all travel unless the inherent advantages of the car are reduced by congestion, by road pricing or by reducing the capacity of roads (see here).

  3. jack horner says:

    All change is marginal. Elasticity of demand is greater in the long term than the short term as people adjust their behaviour and life choices over time.

    Discussions based on ‘what would *people* do if….’, unconsciously treating ‘people’ as a single entity who will accept or reject a single choice, misstate the question.

    Not particularly criticising this post in this regard. But idiotic speculations about what ‘people’ (singular) would do if… are the bread and butter of tabloid journalism on transport problems.

    Similarly with roads lobby statements about how ‘people’ (singular) are in love with their cars. Some of them are most of the time, and most of them are some of the time, in a great variety of combindaions, depending on what they want to do and what their options are. Public transport advocacy aims to change those choices at the margin.

  4. […] areas overwhelmingly work within the suburbs and relatively close to where they live. Petrol is not expensive relative to average incomes and new cars are remarkably […]

  5. Am I the only one who remembers Ivan Illich’s Energy and Equity, wherein he argues that increasing speed (across society’s technology) increases the unfairness of resource allocation. Similar to higher efficiency increases energy; and energy expenditure is one of the main drivers of per unit housing types in urban consolidation.

  6. […] because they started rising at a higher rate than the CPI about 10 years ago. However as I’ve discussed here, they didn’t rise any faster than average earnings over this period. Further, the flattening in […]

  7. […] graph lifted from The Melbourne Urbanist, Sydney graph from Stubborn […]

  8. […] would actively want to live at higher densities. But the doubling of the real price of petrol between 2000 and 2008 and the huge squeeze on housing affordability in recent years haven’t so far been enough to […]

  9. […] the cost of driving has also risen. For example, the price of petrol has increased much more in real terms over the last ten years than fares. Third, to the extent that the increase […]

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