The Effect of Fuel Price Changes on Fleet Demand for New Vehicle Fuel Economy

Abstract

New vehicle purchases by private companies and government agencies, or ‘fleet’ buyers, represent a significant percentage of overall new vehicle sales in the United States. Yet little is known about fleet demand for new vehicle fuel economy including how it responds to fuel price changes. Using unique disaggregated data on fleet and household registrations of new vehicles from 2009 to 2016, we estimate how fleet demand for new vehicle fuel economy responds to fuel price changes. We find that fleet purchases of low fuel economy vehicles fall relative to high fuel economy vehicles when gasoline prices increase, a finding that is consistent with fleet buyers’ taking into account capitalization of fuel costs in the second‐hand market. Our estimates imply that raising gasoline prices by one dollar would increase fuel economy of new vehicles acquired by fleet buyers by 0.33 miles per gallon. We estimate a similar response for household buyers during the same period. This result justifies basing fuel economy responses to fuel cost changes on household data alone, an assumption widely used in the vehicle demand literature and the fuel economy valuation literature. We also find, however, that the response to fuel price changes varies across the types of fleet buyers: rental companies respond strongly to fuel price changes, whereas commercial and government buyers are insensitive. Our estimates imply that an increase in the federal gasoline tax would modestly increase fuel economy of vehicles bought by households and rental companies but would have little to no impact on fuel economy of vehicles bought by non‐rental companies and governments.

A Dynamic Carbon Tax on Gasoline

“…While many studies have tested for the effect of gasoline price levels on vehicle fuel efficiency, they did not consider the effect of gasoline price volatility or any other proxy for gasoline price uncertainty on the same variable (e.g. Leard et al, 2019, Antweiler and Gulati, 2016, Barla et al, 2016, Klier and Linn, 2013, 2010, Li et al, 2014. Lin and Prince (2013) and Scott (2015) tested for the effect of gasoline price volatility on gasoline demand, but not on vehicle fuel efficiency specifically.…”