Government & Economics 101—Deconstructing Holman Jenkins’ “Prius Follies”

Hey everyone, Don here.  Don’t know how many of you had the “pleasure” of reading Holman Jenkins’ rant against buying a hybrid (you can find a good chunk of it here, but you’ll need a subscription to read the whole thing), but given it was so full of basic logical holes, yet still somehow made it through the editorial process at the Wall Street Journal, I felt it needed a response.  Here’s what I wrote:

To the Editor:

It may seem obvious, but people who carpool, combine driving trips, or buy an efficient vehicle like the Toyota Prius save fuel that directly reduces the amount of oil burned. Yet Holman W. Jenkins, Jr. seems to disagree with this simple fact on what can only be assumed are ideological grounds ("Prius Follies, Take Two," December 14, 2005).

Jenkins ignores basic economics and common experience, which show that changes in fuel price have a relatively small effect on demand. Furthermore, despite Jenkins’ incorrect assertions, growing sales of the fuel-sipping Prius don't mean Toyota can sell more gas-guzzling SUVs and pickups. Cars and trucks must meet separate fuel economy standards, and beating the standard on cars does not affect a manufacturer’s obligations with respect to its truck fleet. Although Toyota has regrettably been increasing its sales of larger trucks, it has been able to do this because its trucks have traditionally exceeded fuel economy standards. The bigger problem is that vehicles today average just over 24 miles per gallon, lower than they were 20 years ago. That's why increasing fuel economy standards has become a bipartisan issue that Americans support.

Now, allow me to elaborate a little, since brevity is the watchword when writing a letter to the editor.

• Demand for gasoline is known to be highly inelastic with respect to price. This is why prices have gotten as high as they have - because increases in price have not stemmed demand significantly. In general, consumption will change very little compared to the change in price. Jenkins' claim that the oil saved by Prius drivers will be burned somewhere else is therefore erroneous. In reality, the vast majority of this oil will indeed be saved.

• Jenkins' claims about Canadian tar sands versus Middle East oil fields, while perhaps meant to be tongue-in-cheek, are premised on equally weak logic. While increased prices can be expected to spur development of alternatives, they are also likely to spur increased development of conventional oil reserves in currently producing regions worldwide, including the Middle East. Regardless of any advances in tar sands production, the easily-drilled oil of the Middle East will likely remain the most cost-effective source of crude oil. One can therefore only hope that Jenkins is joking when he suggests that driving a Hummer will reduce dependence on Middle Eastern oil.

• Jenkins claims that Iraqi oil exports are worth much less than what the US has spent on military activity in Iraq. While this is true, he ignores the fact that Iraq contains 115 billion barrels of proven reserves, worth nearly $6 trillion at $50/bbl. Although current production remains relatively low, the long-term potential is very large.

• Finally, Jenkins wrongly attributes all of the increase in vehicle travel over the last 30 years to CAFE standards. In reality, demand for travel was growing before CAFE and is projected to continue growing in the future, even in the absence of increases in fuel economy. Here again, Jenkins is ignoring the fact that demand is relatively inelastic with respect to price. The increase in vehicle miles traveled due to the decreased cost of driving, known as the rebound effect, is around 10%, according to recent research. That means that a 50% increase fuel economy can be expected to result in about a 5% increase in miles traveled - pretty minor, and a lot less than Jenkins asserts.

So hop in your hybrid safe in the fact that you are doing a bit more for our energy and environmental security than the average Hummer driver.  And while you’re at it, have a healthy and happy New Year from me, and the entire UCS HybridCenter team.

Posted by: Don

Comments

[Alan Pratt]

Good points. This particularly poor piece written by Mr. Jenkins has generated quite a buzz in hybrid cirlces. Mostly good in my opinion, because it gets people thinking about just how wrong people like Jenkins are. His point about fuel saved by Prius drivers is not really saved is totally ludicrous, but I have seen this concept repeated by quite a few folks recently. Jenkins logic assumes that an individual hybrid driver exerts an influence on the world oil market, which is not true. It will take many millions of hybrid drivers to discernably influence the world oil market, and even then, the influence will be small. Therefore, any fuel you save by driving a hybrid will remain saved.