How price shocks in formative years scar consumption for life

Teens who experienced gas price shocks of the 1970s drive less in later years, according to experts at Wharton and the Federal Reserve Bank of Philadelphia.

Were you a teenager in the 1970s when gasoline got costlier and later found yourself driving less? If yes, you may be part of a generation whose “later-life travel behavior” was shaped by gas price shocks in its formative years, according to a research paper titled “Formative Experiences and the Price of Gasoline“ by Arthur van Benthem, Wharton professor of business economics and public policy, and Christopher Severen, a senior economist at the Federal Reserve Bank of Philadelphia.

Car parked between pumps at a gas station in the 1970s beneath a sign reading STANDARD OIL COMPANY.

The 1970s saw two major oil price shocks. The first was in 1973­–74 when Arab countries imposed an oil embargo on the U.S. that caused oil prices per barrel to soar fourfold in four months to $11.65 a barrel. With that, gasoline prices in the U.S. climbed 14 cents to 53 cents a gallon. The bigger shock came in 1979­–80 when oil supplies ran short of strong global demand in the aftermath of the Iranian Revolution. Between late 1978 and early 1981, drivers in the U.S. saw the price at the pump nearly double from 63 cents to $1.31 a gallon. “It was the first time gasoline in the U.S. sold at more than a dollar a gallon,” says van Benthem.

Those shocks scarred their gas consumption for life. “Those who came of driving age during the oil crises of the 1970s drive less in the year 2000,” the paper finds. The doubling of gasoline prices in the late 1970s saw that generation drive 3.6% to 8.7% less than those born earlier or later, according to data the study tracked on miles traveled and vehicle ownership; a smaller group of 0.4% did not buy cars and used public transit.

“Individuals respond to price changes during their formative driving years much more so than to price levels,” the paper states. “[Those] effects are not explained by recessions, income, or costly skill acquisition (learning to drive) and are inconsistent with recency bias, mental plasticity, and standard habit-formation models. Instead, they likely reflect formation of preferences for driving or persistent changes in its perceived cost.”

“The lack of an effect of gasoline price shocks outside this formative window suggests that initial experiences are more important than cumulative experience in some settings,” the paper continues. “First impressions … matter a lot.”

Read more at Knowledge at Wharton.