It is hard to know if the relatively changes we see in gas consumption are “sufficient” from an economic perspective. After all, we don’t know what it should be.
Here are some speculations on why we might not see much reaction to increased gas prices…
Hi, I’m Dan Ariely. I do research in behavioral economics and try to describe it in plain language. These findings have enriched my life, and my hope is that they will do the same for you.
My latest book, The Upside of Irrationality, explores some positive and some negative ways that irrationality plays out in our lives.
When we make decisions we think we're in control. But are we?
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Dan, are you kidding me? I don’t know where you live, but I see people reacting strongly to gas prices here in New York. In rural areas where there is no public transportation and buying gas is a necessity, people are really feeling the pinch. I also do not agree with your hypothesis that maybe people see rising gas prices as “justified.” Why do you think paying more for beer and food at an airport or a hotel is “justified?” I have a different word for these practices – it’s called oportunistic.
I think it is because we have accepted that someone bigger than us is in control. We cannot fight the big corporation and win. Also, we define all relationships in simple terms and figuring out every factor that affects the price of gasoline is too complex. Once we exceed our complexity threshold, we simply tune out.
If you toss frogs in a pot of boiling water they’ll jump out immediately. If you put them in lukewarm water and rise the heat slowly then they cook to death.
So basically, we’re frogs getting cooked slowly.
I agree with you that people are NOT reacting strongly enough. They’re talking and mildly changing their behavior but they are not protesting.
Consider what happened with the do-not-call list. They got so angry that they contacted their congressmen and congress changed the law overnight.
This isn’t as easy because the oil lobbies are embedded in Washington but with enough pressure even this can be addressed. At the very least the oil companies shouldn’t get tax breaks will picking our pockets.
But it’s also a matter of the time scale and “stickiness” of the coping mechanisms as well.
In the short term, one would expect to see minor changes in behavior: combining trips, canceling or changing regular vacation plans, and so on. In that same timeframe, though, it would be completely impractical to adjust other aspects of your behavior, like where you live, what you drive, and so forth. You just can’t adjust your housing consumption or consumption of other durable goods on such short notice.
(Illiquidity in the housing market doesn’t help, either…)
Over the longer term, though, these decisions will be made, and broader, systematic impacts of gas prices will be felt. People will demand housing closer to where they work, and will demand more fuel-efficient cars. Transit will become more popular. People will make their houses more energy-efficient. And so on.
Couldn’t it be simply that it is not that easy to cut down on driving and there is no substitute for oil? Given that you are in the US and public transportation is not great, it is quite comprehensible that people don’t react substantially. Not sure if it is a shrewd counter example but if it were the price of the price of beer that went up, people would shift to whisky, vodka etc and thereby demand for beer would drop. But in this case, they are devoid of options.
Well I sounded way too orthodox by uttering such an idea, especially on predictably irrational.
I’ve said for about the past 10 years that gas prices will have to get up around $20 / gallon before we see immediate and drastic changes in people’s lifestyles. As others have said, most gas is consumed for purposes that we cannot change quickly (where we live and work, where the kids go to school, etc).
If OPEC is smart, they will use our irrational behavior against us and intentionally make gas prices dip much lower periodically. Such irregularity could make us hopeful that gas prices wouldn’t keep going up (as you said) and the next time we buy a car or get a new job or house we will not factor in the likely future cost of gas, since we hope it will stay cheaper or go back down in the future.
No doubt, if incremental cost increases were one way, reactions might be more intense. And there’s historic evidence that the old frog metaphor is probably true.
When the 1974 oil shortage occurred, we were faced with the threat of no gas at all, a very different prospect than higher prices. That threat led to some big changes. Among them were CAFE standards, which eventually caused oil prices to fall. Perhaps predictably, that price fall led to public indifference, and now we’re back in the soup on a slow burner this time — at least for the moment.
It’s also clear that our land use has been developed in patterns that require lots of driving for most people. That can’t change overnight. With a lack of alternative transportation and cost effective fuel alternatives, we’re stuck with oil for the time being.
Given these constraints on consumers, we might look for a reaction to rising gas costs at car dealerships. Today’s NY Times reports that the demand for fuel efficient vehicles is increasing while sales of less efficient vehicles is dropping.
This strikes me as startlingly rational consumer behavior, especially given the current political arena where energy policy is anything but rational.
Dan:
A 4th reason why we haven’t reacted violently to the increase in gas prices, a reason unique to the Boston area:
If you can spend $8 billion on a tunnel that is already falling apart, leaking, and killing people, why would $3.80 per gallon gas bother anybody?
Agreed. It seems most likely that $4/gallon is still very cheap, in the big scheme of things.
If prices are unbearable, people will change their ways. If they are bearable, then people won’t. Seems simple enough…
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I am very worried about gas prices, because they are driving the price of almost everything skywards. What will happen to the price of groceries, electricity, rent, etc when gas goes to $5 per gallon? When will it stop rising? I am just married and about to have a new baby in a few months and I am scared to move to a 2 Bedroom apartment because what if the cost of living increases so much we cannot afford it. Luckily we have two very fuel efficient cars, what else can we do to offset the rising costs? When will it stop?
these gas prices will have even more devastating effects on crime and violence within the lower to lower-middleclass as americans will be left with fewer survival options. has anyone ever watched the Mad Max series, its coming to be a reality. slowly but surely. well frogs how long are we gonna simmer. here in SC violent crimes are already rising while opportunity is dropping and gas prices are soaring. get ready to practice your right to bear arms.