Gasoline prices, gasoline consumption, and new-vehicle fuel economy: Evidence for a large sample of countries

Countries differ considerably in terms of the price drivers pay for gasoline. This paper uses data for 132 countries for the period 1995-2008 to investigate the implications of these differences for the consumption of gasoline for road transport. To address the potential for simultaneity bias, we use both a country's oil reserves and the international crude oil price as instruments for a country's average gasoline pump price. We obtain estimates of the long-run price elasticity of gasoline demand of between -0.2 and -0.5. Using newly available data for a sub-sample of 43 countries, we also find that higher gasoline prices induce consumers to substitute to vehicles that are more fuel-efficient, with an estimated elasticity of +. 0.2. Despite the small size of our elasticity estimates, 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.