Working Paper

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

Dec 7, 2017 | Benjamin Leard, Virginia McConnell, Yichen Christy Zhou

Summary

We assess how changing fuel prices affect vehicle purchase decisions for rental car companies and other fleet buyers in the United States and compare the results to retail vehicle purchases.

Key Findings

  • Private companies and government agencies (i.e., “fleet” buyers) make up about 15–20 percent of all new vehicle demand in the United States.
  • These fleet buyers play a significant role in the effectiveness of fuel consumption policies, but little is known about fleet demand for new vehicle fuel economy.
  • We find that fleet purchases of larger, fuel-inefficient vehicles increase relative to smaller, fuel-efficient vehicles when gasoline prices fall. The response is similar to that of retail buyers.
  • The response to fuel prices changes varies across types of fleet buyers: rental companies respond strongly to fuel price changes, whereas commercial and government buyers are unresponsive.

Abstract

New vehicle purchases by private companies and government agencies, or “fleet” buyers, represent a significant percentage of overall new vehicle demand in the United States. Yet little is known about fleet demand for new vehicle fuel economy including how it responds to fuel price changes. In this paper, we examine economic reasons of why fleet managers might adjust vehicle purchases in response 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 increase relative to high fuel economy vehicles when gasoline prices fall. Contrary to anecdotal evidence that fleet demand is unresponsive to fuel price changes, our finding is consistent with fleet buyers taking into account capitalization of fuel costs in the second-hand market. We compare the fleet demand response to household demand during the same period and find that, on average, household and fleet buyers respond to fuel prices changes in similar ways. This result justifies 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 unresponsive.