Monday, December 13, 2010

Relive the 1970s? You Can See Your Old Car in Caracas

Caracas, Venezuela has an older vehicle stock. "We like our cars to be like tanks in this country, meaning they should be huge, comfortable and preferably manufactured in the United States,” said Miguel Delgado, 52, a mechanic in Los Frailes, a slum on this city’s western fringe, where he was working on a 1976 Dodge Coronet and a 1979 Chevrolet Impala."  

With gas prices at 10 cents per gallon, the people of Caracas can splurge on fuel inefficient vehicles and the early 1970s live on.  Now, we know that Venezuela is not a rich nation and that vehicles over age 30 are not demanded by rich people.  This combination of cheap gas and demand for relatively "low quality" roomy cars creates an economic environment in which durable cars can live on for a long time.

This point is exactly what Lucas Davis and I were thinking about when we wrote our NAFTA paper.  You remember that one?  Here is the abstract:

Since trade restrictions were eliminated in 2005, Mexico has imported over 2.5 million used vehicles from the United States. Using a unique, vehicle-level dataset, we find that traded vehicles are dirtier than the stock of vehicles in the United States and cleaner than the stock in Mexico, so when a vehicle is traded from the United States to Mexico average vehicle emissions per mile tend to decrease in both countries. Overall, however, the evidence suggests that trade has increased total lifetime emissions, primarily because of low vehicle retirement rates in Mexico. (JEL F13, F14, L62, O13, O19, Q53, Q56)

The same logic will hold for trade between the USA and Venezuela.

Why does this matter? We want the world vehicle stock to be energy efficient. If gas prices are really low in some large countries then the average fleet fuel economy there will be real bad.  Investment in vehicle energy efficiency will be higher if vehicle makers believe that all potential customers will face a high gas price per mile (and hence will demand energy efficient vehicles).