What Affects The Demand for Motor
Gasoline in the US?
Prepared by
Milana Borisev
(Business, Economics major)
October 13, 2006
ABSTRACT
Gasoline has been and is still the one of the crude oil products that is demanded by all
industrialized nations including the United States. This research paper examines different
factors which determine the level of demand for gasoline, and derives the United States
demand function for gasoline, utilizing statistical regression method. The data includes sets
from the period 1990-2003
Introduction
Gasoline is one among many products, such as: kerosene, heating oil, diesel fuel, jet fuel and others,
that can be made from refining crude oil. It produces energy to propel vehicles, power turbines and heat
factory facilities. The versatile of gasoline has led to its consumption in a variety of sectors such as:
transportation sector (for use in cars, trucks buses, trains and air plains) and non-transportation sector
(manufacturing, residential and service). Gasoline is considered as a necessity good in most of the ways it
is consumed.
The market of motor gasoline is considered to be oligopoly because it has following features\:

Market dominated by a few large suppliers

Each firm produces branded products

Barriers to entry

Interdependence between competing firms. Business has to take into account likely reactions of
rivals to any change in price an output.
Gasoline represented the greatest consumption of all oil products. In 1994, about 43 percent of all
petroleum products supplied were gasoline. “Gasoline that is produced in United States\refineries, also
5%of US gasoline consumption that is imported, is distributed throughout many channels “.i
Environmental regulations affect the product quality of motor gasoline. There are three types of motor
gasoline according to their quality:

Conventional gasoline

Reformulated gasoline (makes up about one-third of all gasoline sold in the United States)

Oxygenated gasoline (makes up about 5 percent of the gasoline sold during the winter months,
November through February, and averages about 1.3 percent over the full year)
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Motor gasoline can also be classified by octane ratings. In general, automotive octane requirements are
lower at high altitudes. Each type of gasoline (conventional, oxygenated and reformulate) is classified by 3
grades.

Regular - Gasoline having an antiknock index, i.e., octane rating, greater than or equal to 85 and
less than 88.

Mild grade - Gasoline having an antiknock index, i.e., octane rating, greater than or equal to 88
and less than or equal to 90

Premium - Gasoline having an antiknock index greater than 90
The consumption of motor gasoline in the United States is strictly seasonal, with the higher
consumption in the summer and less consumption during the winter. If we are looking on a yearly basis, the
consumption of motor gasoline in the United States has been rapidly increasing as vehicle-miles increases.
Graph 1- Consumption of motor gasoline
The graph 1 presents the change in consumption over the specific period of time. “In the week of July
20, 2001, the consumption of motor gasoline reached a record high of 9.2 million barrels per day.
Thereafter, the consumption has decreased. In the most recent reporting week (Apr. 5, 2002), the
consumption was 8.8 million barrels per day, 4 percent lower than its peak in July”ii. Also, there was a
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large increase in consumption of crud oil between 2003 and 2004 from 20 million to 20.4 million with the
largest consumption being attributed to motor gasoline consumption.
In 1991, the average household spent around $ 1,162 for motor vehicle fuel. Between years 1991 and
1996, fuel consumption increased by 60%. “Continuing rapid growth in the United States gasoline
consumption is of particular interest, because of various environmental consequences, from increasing
urban population and congestion to overall climate change.” iii
Most of the economists and other researchers believe that the consumption will decline in some
relationship to the amount of price increase. This issue is very hard to prove because there are also some
other factors in a short term that are related to consumption and have some effect on it. As Schmalensee
and Stoker stated in their article, the subject of price and its relationship to demand is extremely complex. iv
Economists, marketers and other researchers, have devoted a lot off effort to explain this subject, but it is
very hard and complex to prove weather consumption will decrease if price increase, relative to other
factors.
This research paper derives a linear demand function for motor gasoline in the US, which will take a
form similar to the equation below:
Qxd = α0+ αxPx + αyPy + αMM
αis are fixed numbers that show the behavior of each variable in the demand function. Regression analyses
will be used to derive a function similar to the above for the United States consumption of motor gasoline.
The next section presents conceptual framework for analyzing motor gasoline data, section 3 would
present and describe the data being utilized, section 4 would include an explanation of the regression
method that is used and last two sections would present the results of the regression method and
conclusion.
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Conceptual Framework
The conceptual framework for deriving the demand for motor gasoline in the United States includes
gasoline consumption data, gasoline price data and Gross Domestic Product.
The consumption of gasoline is dependent Y variable, and Gross Domestic Product and gasoline prices
will present independent X variables, and values of αis would be calculated in order to derive the demand
function.
Data
The data being utilized spans the time frame of fourteen years, from 1990-2003. Data was collected for
the US Motor Gasoline Consumption, United States GDP in billions and United Sates Motor Gasoline
Prices 2004 constant dollars per barrel.
Statistical Methods
Regression analysis was used to determine the equation of the demand function for Motor Gasoline in
the United States. Line graphs were also derived to determine the changes in price, GDP and income level
over the fourteen years.
Results
The results of the performing multiple regression analysis gave the demand function for the Motor
Gasoline in the US:
Qxd= 50 216.99+ 12.2 Px + 1.32 M
This function shows that there is positive relationship between the GDP and quantity demanded as our
income increase we are able and willing to consume more. Similarly, an increase in price of gasoline cause
an increase in quantity demanded of gasoline. This is true as increase in gasoline prices is usually
interpreted as meaning that the gasoline prices are on the rice so buyers increase how much they purchase
to stock up or create reserves. From these perspectives it is clear to see why there exist a positive
relationship between the quantity demanded and the price, since gasoline can be considered a necessity to a
large extent.
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The line graphs show that both the consumption of gasoline and the price of gasoline had increased
over the period of time. From this we can see that there is a positive correlation between to variables as
income directly influences the purchasing power of the individual and economy as a whole. Gasoline has
continued to fluctuate over time, but in recent years there has been a general increase in the price.
Conclusion
Even though we saw from the literature review that it was very complex for economists to explain
weather there is a positive or negative relationship between the price and consumption of motor gasoline.
From this analysis it is clear that the demand for motor gasoline in United States is influenced by the price
of the commodity in question, our income level and also the GDP
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References:
- Richard Schmalensee, Thomas Stoker “Household gasoline demand in the US”. Econometrica, (May
1999) Vol: 67, Issue 3, pp645-662. - http://journals.ohiolink.edu/local-cgi/sendpdf/06091311491053534.pdf
- John F. Willenborg, Robert E. Pitts: “Gasoline prices: Their effect on consumer behavior and attitudes”;
Journal of marketing, (Jan. 1997) Vol: 41, No.1, pp24-31. http://www.jstor.org/view/00222429/ap040169/04a00070/0?currentResult=00222429%2bap040169%2b04
a00070%2b0%2cFF01&searchUrl=http%3A%2F%2Fwww.jstor.org%2Fsearch%2FBasicResults%3Fhp%
3D25%26si%3D1%26Query%3Dgasoline%2Bprices
- Bureau of Transportation Statistics- US Motor gasoline consumption
-
http://www.bts.gov/publications/transportation_indicators/april_2002/Security/html/US_Motor_Gasoline_P
roduction_And_Consumption.html
-
Severin Borenstein, A. Colin Cameron, Richard Gilbert: “Do gasoline prices respond asymmetrically to
crude oil price change?” The Quarterly journal of economics, (Feb 1997) Vol.112, No.1, pp.305-339http://www.jstor.org/view/00335533/di981866/98p0011r/0?currentResult=00335533%2bdi981866%2b98p
0011r%2b0%2cFFFFFEFF0F&searchUrl=http%3A%2F%2Fwww.jstor.org%2Fsearch%2FBasicResults%
3Fhp%3D25%26si%3D1%26Query%3Dgasoline%2Bprices
-
U.S. Department of Energy, Energy Information Administration- US average prices of the motor
gasoline- http://tonto.eia.doe.gov/dnav/pet/xls/pet_pri_allmg_d_nus_PTA_cpgal_a.xls#'1-Gasoline, All
Formulations'! A1
-
U.S. Department of Energy, Energy Information Administration- US total gasoline deliveries by all
R&G- http://tonto.eia.doe.gov/dnav/pet/hist/a103600001a.htm
S. Borenstein, A. Cameron; R.Gilbert : “Do gasoline prices respond asymmetrically to crude oil price
change?” .The Quarterly journal of economics 112 ( Feb.1997): pp.305-339
ii
Bureau of Transportation Statistics- US Motor gasoline consumption
iii
R.Schmalensee, T.Stoker: “Household gasoline demand in the US”. Econometrica 67(May 1999):645662
iv
J.F. Willenborg, R.E. Pitts (Jan. 1997): “Gasoline prices: Their effect on consumer behavior and
attitudes”. Journal of marketing 41 ( Jan.1997) : pp24-31
i
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