Energy price volatility affects decisions to purchase energy using capital: motor vehicles

Abstract

I investigate how energy price volatility affects consumer decisions to purchase durable, energy using capital, motor vehicles. A cointegrating vector autoregression (CVAR) model indicates that; (1) high price volatility reduces the negative effect of motor gasoline prices on monthly purchases of motor vehicles, (2) consumers consider passenger cars to be an inferior good and this drives the substitution of light trucks for passenger cars, (3) the own price elasticity of demand for vehicles is about -0.3, which is consistent with estimates used to justify The Safer Affordable Fuel-Efficient (SAFE) Vehicles Rule for Models Years 2021-2026 Passenger Cars and Light Trucks. Simulating the CVAR model indicates that implementing an energy tax rapidly or during a period of low price volatility has a greater effect on motor vehicle sales than implementing the same tax slowly or during a period of high price volatility. Together these results suggest that more research should focus on how energy price volatility affects consumer decisions to purchase energy using capital.