Farmers Insurance Releases a Study on the Impact of Gasoline Prices on Consumers' Driving Habits

LOS ANGELES--Farmers Insurance today released the results of a preliminary economic analysis of the effect of gasoline prices on vehicle miles traveled, choices of transportation and driving habits by its customers and other drivers in the United States. The study provides a framework to quantify how rising gasoline prices affect vehicle use.

“In the past few years, and especially this year with oil prices nearing $100 per barrel, media reports on gasoline prices occur daily,” noted Kevin Mabe, Farmers Insurance economist. “Our preliminary study shows that one aspect of higher gasoline prices has affected our customers’ choices for transportation. For example, nearly 12,000 of our customers in many of our states have purchased hybrid vehicles and taken advantage of the Farmers’ automobile insurance policy discount offered for operating a hybrid vehicle.”

The analysis includes an economic demand model of vehicle miles traveled that controls for effects of income, gasoline prices, and the price of an alternative method of transportation -- air travel. The model excludes other factors that affect the quantity of driving, such as car prices and maintenance costs, because of their strong relationship with income and gas prices.

In agreement with many other academic and industry studies, the Farmers analysis estimates that quantity of driving is highly inelastic with respect to gasoline prices. “As gasoline prices rise, consumers have cut back on their driving, but only slightly,” Mabe explains. “Instead, consumers have curtailed spending on other discretionary expenditures such as entertainment in order to maintain their level of driving, especially in the short run. Work commutes, trips to school, and excursions to the grocery store must still occur without significant interruption, even in the face of higher gasoline prices,” he said.

The analysis also estimates the impact of higher gasoline prices on vehicle miles traveled since 2003. Had the trend of gasoline prices from 1979 to 2002 remained stable without the recent run-up of prices, the analysis suggests that vehicle miles traveled would have been nearly 2% higher than what actually occurred from 2003 to 2007 when over 250 billion vehicle miles were driven. “Higher gas prices have begun to persuade drivers to begin to change their driving habits, both in terms of lengths and frequency of trips as well as choice of vehicle,” Mabe continues. “Furthermore, the more that consumers decrease their driving because of higher gasoline prices, the lower the probability of a collision.” Frequency of auto claims drop, on the margin, during periods of sustained high gasoline prices.

In the long run, consumers have more flexibility to respond more dramatically to sustained elevated gasoline prices, such as using a more fuel-efficient vehicle or even moving closer to work or school. “We hope to soon enhance this analysis by addressing both the short- and long-run effect of high gasoline prices and explore alternative theories of consumers’ response patterns,” Mabe said.

“This study provides us another piece of the puzzle in researching the effect of gasoline prices on our business,” Mabe concluded.

NOTE: Anyone wanting a copy of the preliminary study can request it from Kevin Mabe at Kevin.Mabe@farmersinsurance.com or writing Farmers Media Relations at 4680 Wilshire Boulevard, Los Angeles, California 90010 (Third Floor).

Farmers Group, Inc. is a wholly owned subsidiary of Zurich Financial Services, an insurance-based financial services provider with a global network of subsidiaries and offices in North America and Europe as well as in Asia Pacific, Latin America and other markets. Farmers® is the nation's third-largest Personal Lines Property & Casualty insurance group. Headquartered in Los Angeles and doing business in 41 states, the insurers comprising the Farmers Insurance Group of Companies provide Homeowners, Auto, Business, Life insurance and financial services to more than 10 million households. For more information about Farmers, visit our Web site at www.farmers.com.