Falling oil prices dominated news headlines in late 2014. Heading into the New Year the cost of a barrel of oil dipped below $50, down from $95 in October. Falling energy prices may have provided a holiday bonus to consumers, but what are the social and ecological costs of cheaper fuel on consumption, momentum on energy efficiency innovations and greenhouse gas emissions?
In the short term, the impacts may be small. This is due to the relative inelasticity of demand for travel by car. Price elasticity refers to the responsiveness of demand to changes in price. According to the US Energy Information Administration the price elasticity of gasoline requires a 25% - 50% decrease in the price of gasoline to raise automobile travel by 1%. A number of factors contribute to the relative inelasticity of demand for gasoline, including the relative infrequency of vehicle replacement and the engrained habits of drivers.
However, in the long term, vehicle choices and behaviour patterns will reflect the cost of gasoline more directly with disastrous climate implications. Consumers will prioritize features other than fuel efficiency when purchasing new vehicles and may curb cost considerations in their decisions related to transit use and car-pooling. Moreover, this may have a lasting impact even after fuel prices begin to rise again due to the same short-term inelasticity of demand for gasoline. Even more importantly, increasing energy efficiency and alternative renewable fuel sources may lose their momentum. Niche opportunities and future innovations could be impacted.
With gas prices anticipated to remain low in 2015, we can expect driving behaviour and fuel consumption to remain about the same as it was in 2014. But, if the current price shock turns into a longer term trend, it is worth considering the implications of higher gas consumption.