Countries differ considerably in terms of the price drivers pay for gasoline. Using data from a large sample of countries, this paper provides new evidence regarding the implications of these differences of the consumption of gasoline for road transport and the fuel economy of new vehicles.
To address the potential for simultaneity bias in ordinary least squares estimation, we use a country’s oil reserves as an instrument for its average gasoline pump price. We obtain estimates of the long-run price elasticity of gasoline demand of between –0.2 and –0.4, a smaller elasticity than most existing estimates. The results also indicate that higher gasoline prices induce consumers to substitute to vehicles that are more fuel-efficient, with an estimated elasticity of +0.2. While gasoline demand and fuel economy are both inelastic with respect to gasoline prices, there is considerable scope for low-price countries to achieve gasoline savings and vehicle fuel economy improvements via reducing gasoline subsidies and/or increasing gasoline taxes.