Fun With Research: Higher Fuel Prices Increase Economic Productivity

Last week I posted a blog, "Win-Win Transportation Emission Reduction Strategies: Good News for Copenhagen" which described emission reduction strategies that also help achieve economic and social objectives. I've continued doing research on the subject and made some additonal discoveries that I can report on now.

I've been investigating the relationships between various transportation policies and economic productivity, generally measured as per capita Gross Domestic Product (GDP). I had already found that GDP tends to increase with transit ridership and density, and decline with vehicle miles traveled (VMT) and roadway supply. This essentially validates general analysis on the economic benefits of agglomeration (the value of locating economic activities close together, which is why cities exist) and of a more diverse and efficient transport system (indicated by higher transit ridership). Then it occurred to me to test the effect of fuel prices on productivity.

Fortunately, data on fuel price is readily available at www.internationalfuelprices.com, and per capita GDP for individual countries is available from various sources, including some listed in a Wikipedia page. I started with the OECD countries (about two dozen wealthy countries), and found a relatively strong positive relationship between fuel price and GDP, particularly if the U.S. and Canada are excluded.  I decided to expand the dataset to include more countries. There are about 170 in total.

Fortunately, I found that I could copy country-GDP data directly from the website into a spreadsheet, but I still needed to hand copy the gasoline price data. That took about an hour. The results were not very impressive. Considering all countries there is only a weak relationship between fuel price and GDP (R2 about 0.1). So I tried a few variations, such as analyzing continents individually, which did not prove very helpful.

Then I tried a different approach. I divided countries into those that produce oil and those that do not. This made a huge different. Among countries that do not produce petroleum, there is a very strong positive relationship between GDP and fuel price, particularly if I excluded those with very low-income (GDP averaging less than $2,000 annual per capita), showing a high R2 value of 0.3633.

I think that the results, illustrated below, are facinating (for a better view and addional discussion see the full report, Evaluating Transportation Economic Development Impacts).

Fuel Price and GDP For Various Countries

Gross Domestic Product (GDP) tends to increase with fuel prices for countries that do not produce petroleum.  

These results are consistent with my current research which shows that excessive motor vehicle travel can reduce economic productivity, and mobility management strategies that improve transportation options and price transportation tend to increase productivity. This implies that relatively high fuel prices, and other vehicle user charges, can be applied without threatening economic development.

This is important for current debates about the economic costs of emission reductions. Critics claim that, because mobility is essential for economic activites, any effort to reduce vehicle travel is economically harmful. This research indicates otherwise. It suggeests that, beyond an optimal level, increased vehicle travel reduces economic growth because it is used for less productive purposes (a form of declining marginal benefit) and increases costs such as congestion, facility costs, accident damages and sprawl. As a result, in high VMT regions, mobility management strategies that improve travel options and more efficiently price roads, parking, insurance and fuel tend to support economic development. We can have wealth and a clean environment, if we focus on efficiency!