Price elasticity of household fuel comsumption

The high levels reached by world oil prices and fuel prices in mid 2008 have raised notable concerns about the risk of future significant drops in household purchasing power. In the framework of a national strategy to reduce CO2 emissions, a tax reform on fossil fuels is also being studied. In this context, this paper aims to identify the categories of households that are most exposed to an energy-price increase and to assess the sensitivity of household consumption to changes in fuel prices and (to a lesser extent) in household energy prices. First, we estimate price elasticities using time series data from the French quarterly accounts. We, then, carry out a microeconomic analysis, which enables us to take the heterogeneity of consumer behaviour into account and to assess the impact of a price increase depending on the categories of households. We use individual consumption data from the 2006 "Consumer expenditure” survey. The low price variability between households, which constitutes the main limitation of cross-section data, is circumvented by constructing personalised price indices for each surveyed household, following the Ruiz and Trannoy (2008) methodology. The estimated average price elasticities of demand to fuel prices derived from the time series data are significant, around 0.2 in the short run and 0.4 in the long run. The price elasticity estimates resulting from the micro approach are included in the range 0.7 - 1.0. The microeconomic analysis also shows that the households using their personal vehicles to go to work are less sensitive to higher fuel prices that those who do not use their cars for that purpose. Conversely, the difference in sensitivity between the least and most wealthy households appears to be quite low.