It's Easier Being Green

Conservation is making a comeback -- driven by gut as much as high gas prices

For the past year, mainstream economists have been increasingly surprised as Americans shrugged off rising energy prices. Econ 101 says that demand falls when prices rise, but consumers seemed nonchalant as gas went to $2 a gallon and then, in August, $2.50.

Hurricane Katrina may finally have broken through the wall of indifference -- and not just by pushing gasoline prices higher still. Katrina hit people in the gut, which is where they really make decisions. It provoked shock when prices soared past $3 a gallon, as well as fear that gas could simply run out, as happened at some stations in the hurricane's aftermath.

Even though prices are receding and gas lines have disappeared, research by behavioral economists shows that emotionally searing events continue to affect people's behavior long after the facts on the ground change. That's what happened in the 1980s when Americans kept buying small, fuel-efficient vehicles long after gas prices had fallen back to earth. It wasn't until the early 1990s that sport-utility vehicles caught on and soccer moms started driving pickup trucks. So, while consumers responded less to high energy prices than conventional economics predicted before Katrina, they may respond more than expected now. Will Americans increasingly conserve energy after Katrina? "Emphatically yes, we will," says Cornell University economist Robert H. Frank.

The evidence of Katrina's impact is already coming in. In the first report on post-Katrina auto sales, J.D. Power & Associates said on Sept. 7 that large SUVs and pickups together accounted for 38% of retail sales on Aug. 31, vs. an average of 46% in the first week of the month. At the same time, fuel-efficient vehicles have flown out of showrooms: One week into the month, five Honda dealerships in the Philadelphia area were completely sold out of hybrid Civics and were running low on conventional Civics with good mileage ratings. Wal-Mart Stores Inc. said Sept. 7 that it saw a post-Katrina pickup in sales of compact fluorescent light bulbs -- sales that clearly weren't related to rebuilding from the hurricane.


The crisis-born urge to conserve makes sense to Cornell's Frank and other experts in the emerging field of behavioral economics. To them, people aren't merely rational calculators of self-interest, as traditional economics maintains, but emotional beings pushed and pulled by everything from procrastination and myopia to fear and anger. Given the choice, human nature tends to sit tight. People procrastinate about annoying energy-saving tasks like adding insulation, replacing leaky windows, or changing the air filter on their car, let alone big steps like switching to a vehicle that gets better mileage or hooking up with a carpool. They also tend to be short-sighted, focusing on the near-term costs of energy-efficient technologies -- like expensive compact fluorescents -- rather than the long-term benefits. High prices alone don't always galvanize people into action.

But the shock of Katrina may be a tipping point, forcing many consumers out of the status quo. "For a long time we were below the threshold of awareness on energy. We're now crossing that threshold of visibility, and that's showing up in the consumer reaction," says Peter J. Garforth, the principal of Garforth International LLC, an energy productivity consultancy based in Toledo.

Spot checks across the country reveal a slew of converts to conservation in recent days. In Oxford, Miss., which was mostly spared by the hurricane, Kalyna Bullard and her husband, Mercer, are insisting that their plumber take back an inefficient water heater that he delivered to their front porch while they were away and replace it with one that uses less energy. In Mullica Hill, N.J., Bill Madara, 41, and his wife, Cindi, 42, have decided to spend $20,000 on a solar installation to provide electricity, but not heat, for their home. "The latest jump in oil prices really tipped the balance," says Bill. In Bismarck, N.D., some pleasure boaters are putting their vessels in drydock early and don't plan to take them out next season, says Bob Gibbons, owner of Gibbons Fiberglass & Aluminum Boat Repair. Gibbons himself is thinking about wearing sweaters more this winter -- and maybe getting his delivery truck to run on diesel derived from used cooking oil.

Katrina may accelerate changes that were likely to occur anyway. Even before the hurricane hit, some signs had already emerged that consumers' buying patterns had begun to change. Prices of used SUVs, for example, had started to soften before the hurricane. That's key, because demand for used vehicles is a better indicator of what consumers really want than sales volumes for new vehicles, which are distorted by incentives. In the resale market, prices of large SUVs fell 5% and prices of large pickup trucks fell nearly 4% in August from a year earlier, while prices of compact cars rose 10%, according to Tom Webb, chief economist for Atlanta-based Manheim, the nation's largest clearinghouse for used vehicles. And even before Katrina, hybrid vehicles had gained so much cachet that in focus groups two-thirds of owners of the hybrid Lexus RX 400h SUV said they wanted more of an indication that the vehicle is a hybrid than the whisper-subtle "h" at the end of the vehicle's name.

Now, the trend away from gas guzzlers appears to be picking up speed. Efficiency-minded car shoppers, for instance, were out in force over the Labor Day weekend. "My next car is going to be a hybrid or a car that has higher mileage per gallon," said Patricia Chavez-Dietz, 41, of Atlanta, who was shopping for a car for her daughter. Jennifer Meinel, a 28-year-old consultant in Reston, Va., says she's planning to replace her '95 Toyota Tacoma pickup with a compact car. Having run the numbers on fuel economy, she's leaning toward a Mini Cooper. Says Meinel: "I just don't like the idea of throwing money down the tank."


Some of the effects of Katrina, of course, will wear off as gasoline prices retreat and the disaster gradually disappears from the evening news. Even with events on the Gulf Coast still unfolding, there are plenty of shoppers out looking for heavy metal. For some, the unfashionableness of a big vehicle continues to be trumped by the fear of getting crushed to death in a smaller one. Susan Hartzler, president of Hartzler Public Relations in Los Angeles, bought a Land Rover LR3 over the holiday weekend. Hartzler believes that the SUV she was driving last year saved her life in a freeway accident. "I feel safer in big cars," she says. "I know it's not very PC." And for many upper-income people, even today's high energy prices are nowhere near the choke point. "It's a problem for those who perceive it to be a problem, I guess," says Guy Milliken, 51, of Norcross, Ga., who says fuel efficiency isn't an issue for him in auto purchases. "We're fine," he says. "We don't use things wastefully."

For many Americans, though, Katrina and its impact on the energy markets was undoubtedly a landmark event, raising deep-seated fears about energy security in the same way that September 11 raised lasting fears about terrorist attacks on American soil. Says Cornell's Frank: "Energy is suddenly pretty high on the mental agenda."

It's enough to make you wonder: Is conservation coming back into style? If Birkenstocks can be cool again, why not energy conservation?

By Peter Coy in New York, with David Welch in Detroit, Lauren Young in New York, Rishi Chhatwal in Atlanta, Dave Lindorff in Philadelphia, and bureau reports

Before it's here, it's on the Bloomberg Terminal.