Energy Prices and Tourism: Some Preliminary Observations

Energy Prices and Tourism: Some Preliminary Observations

Order Code RS22496
August 17, 2006
CRS Report for Congress
Received through the CRS Web
Energy Prices and Tourism:
Some Preliminary Observations
Bernard A. Gelb
Specialist in Industry Economics
Resources, Science, and Industry Division
Summary
Energy prices faced by consumers have risen steeply in the last few years, and it is
likely that spending on energy substituted at least to some extent for spending on other
goods and services. It is widely believed that increases in energy prices, particularly
gasoline, negatively affect tourism. The data presented provide partial and preliminary
support on an aggregate level. On the other hand, there is anecdotal evidence that the
effect may not be large. In addition, only part of any slowdown in tourism should be
attributed to energy prices. This report will be updated when warranted by events.
Energy Prices and Consumer Spending
Consumers have faced sharply rising energy prices in the last few years. Most
recently, they increased 28% between the first quarter of 2005 and the second quarter of
2006 (Table 1). Motor gasoline prices, which rose 39% during the period, had increased
31% from their 2002 average to the average for the first half of 2005. Prices paid by
households for natural gas in the second quarter of 2006 were 13% higher than in the first
quarter of 2005, but had been 34% and 28% higher in the fourth quarter of 2005 and first
quarter of 2006. Similar to gasoline, heating oil prices rose 33% between the first quarter
of 2005 and the second quarter of 2006, and had already increased substantially from their
2002 average.
Inasmuch as the price elasticity of demand for purchases of energy in the short run
is low,1 higher energy prices have led to noticeably increased aggregate spending on
energy in absolute terms and also as a percentage of total personal consumption
1 Demand price elasticity is a measure of buyers’ responsiveness to a change in price. The large
number of estimates of the demand price elasticity of gasoline, for example, based upon empirical
studies, average about -0.25 for the short run. A demand price elasticity of -0.25 means that the
quantity purchased will decrease 2.5% in response to a 10% price increase. The short run is a
period in which a consumer has insufficient time to change equipment or significantly alter
behavior.
Congressional Research Service ˜ The Library of Congress

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expenditures. Thus, energy (all forms) accounted for 7.2% of total U.S. consumer
spending in the second quarter of 2006, compared with 6.3% in the first quarter of 2005
and 5.3% in 2002, based upon data generated by the Bureau of Economic Analysis
(BEA). U.S. aggregate consumer spending on gasoline rose from 2.6% in 2002 to 3.4%
in the first quarter of 2005 to 4.2% in the second quarter of 2006 (Table 1).
Table 1. Energy Prices and Energy Expenditures
Spending on Energy
Consumer Price Indexesa
as a % of Total Personal
(1982-1984 = 100)
Consumption
Year and
Expendituresb
Quarter
All
Piped
Heating
All
Energyc
Gasoline
Nat. Gasd
Oil
Energyc
Gasoline
2002
121.7
116.0
135.3
111.5
5.3
2.6
2003
136.5
135.1
166.3
136.6
5.7
2.9
2004 - I
143.7
147.2
174.1
145.1
5.9
3.1
2004 - II
150.8
160.5
175.7
147.4
6.1
3.3
2004 - III
152.3
160.4
181.3
160.7
6.0
3.2
2004 - IV
158.4
170.1
188.6
187.4
6.3
3.4
2005 - I
159.8
169.9
192.5
186.2
6.3
3.4
2005 - II
167.9
182.2
198.3
199.9
6.5
3.5
2005 - III
187.6
216.6
211.5
234.3
7.0
4.0
2005 - IV
192.5
209.3
258.5
246.3
7.1
3.9
2006 - I
192.8
206.4
245.9
231.5
6.8
3.8
2006 - II
203.8
235.8
217.4
248.2
7.2
4.2
Sources: Bureau of Economic Analysis, National Income and Products Table, Underlying Detail
Tables, Table 2.4.5U, Personal Consumption Expenditures by Type of Product, obtained from
[http://www.bea.gov] under “Personal Income and Outlays;” viewed August 10, 2006; Bureau
of Labor Statistics (BLS), data obtained from “CPI - All Urban Consumers” database on BLS
website [http://www.bls.gov/data] viewed on August 10 and 14, 2006.
Note: Spending for natural gas and heating oil as a percent of total personal consumption
expenditures is not shown because household use of natural gas and heating oil tends to be
concentrated in the Midwest and Northeast, respectively. National percentages would understate
the effect of gas and oil price increases on households in those regions.
a. Quarterly data are averages of monthly figures.
b. Personal expenditures on energy as a percent of total personal consumption expenditures.
c. Includes energy forms not shown separately.
d. Utility piped gas service.

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Higher natural gas and heating oil prices probably resulted in much higher aggregate
spending on those energy forms in the Midwest and Northeast, where those energy forms,
respectively, are used very widely. Aggregate spending for natural gas and heating oil as
percentages of total personal consumption expenditures in those regions cannot be
obtained, however, as the BEA data are on a national level, and percentages calculated on
that level would understate the effect of gas and oil price increases on households in those
regions.
Other things being equal, the increase in energy’s percentage of total personal
consumption expenditures from 5.3% in 2002 to 7.2% in the second quarter of 2006
means a shift in spending of $150 billion at an annual rate2 to energy. Unless the increase
in personal income (in current dollars) between 2002 and the second quarter of 2006
(annual rate)3 was sufficient to fully accommodate the increased spending on energy, it
is likely that such spending replaced spending on other goods and services at least to some
extent.
Effects on Tourism
It is widely believed that increases in energy prices, particularly gasoline prices, have
a negative effect on tourism. The data presented above and below provide preliminary
and not unanimous support of this on an aggregate level. Anecdotal evidence, also mixed,
tends to indicate little effect of energy price increases on tourism. In any event, as noted
below, not all of any decline in tourism should be attributed to energy prices.
Some data suggest that there has been some slowdown in tourism. In the first half
of 2006, there were 0.9% fewer air passenger enplanements4 than in the first half of 2005;
the number of air passenger miles was only 1.3% greater; and motor gasoline
consumption was only 0.6% greater (Table 2). These relative changes are less than the
increases of 1.9% in constant dollar Gross Domestic Product (GDP) and 2.5% in constant
dollar aggregate personal income. The second-quarter 2006 profits recorded by the airline
industry seem to contradict the above evidence of a slowdown in air travel. These,
however, are the results of the industry’s cost cutting through capacity reductions,
efficiency improvements (including fuel conservation), and fare increases rather than big
gains in air travel volume.
In any case, because travel is a major component of tourism, and considerable travel
is done for reasons other than tourism, the total volume of travel per se may reflect factors
other than energy price increases. This is especially true of gasoline consumption. Only
2 Total “market-based” personal consumption expenditures in the second quarter of 2006 were
$7,847 billion at an annual rate. 7.2% of that is $566 billion; 5.3% of that is $416 billion. See
Table 1 for source of data.
3 BEA, Survey of Current Business, August 2006. Current dollar data not shown in Table 2.
4 One fare-paying passenger — originating or connecting — boarding an aircraft with a unique
flight coupon.

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40% of vehicle miles traveled by households were for social and recreational purposes in
2001 according to the National Household Travel Survey5
Not indicative of a slowdown in tourism is the 2.4% increase between the first half
of 2005 and 2006 in the number of hotel and motel rooms sold (Table 2), versus the 1.9%
rise in GDP and 2.5% increase in personal income. Average daily room rates were up
6.8%, resulting in a gain of 9.0% in average revenue per available room, according to
Table 2. Selected Travel Indicators
% Change
Indicator
2002
2003
2004
2005
1st Half 2006
from 2005a
Air passenger enplanementsb
613
646
703
739
-0.9%c
(millions)
Air revenue passenger milesb
641
657
734
779
1.3%c
(billions)
Motor gasoline consumption
8.85
8.94
9.11
9.13
0.6%
(million barrels per day)
Hotel/motel room nights sold
935
948
988
1,019
2.4%
(millions)
Overnight stays at national parks
15.1
14.6
14.0
13.8
- 2.9%
(millions)
Reference
GDP
10.05
10.30
10.70
11.05
1.9%
Indicators
($ trillionsd)
Personal incomee
8.58
8.68
8.98
9.18
2.5%
Sources: Air Transport Association (ATA), “Economics” page of website
[http://www.airlines.org] viewed August 11, 2006; Bureau of Economic Analysis, Survey of
Current Business, August 2006; Energy Information Administration, Monthly Energy Review,
July 2006; National Park System, NPS Visitation Database [http://www2.nature.nps.gov
/npstats/npstats.cfm] viewed August 13, 2006; Smith Travel Research, Inc., data sheet sent
August 14, 2006.
a. Based upon data not shown separately.
b. Except where indicated, air travel data are for scheduled services by U.S. airlines.
c. Data for airline members of the Air Transport Association.
d. Constant (2000) dollars.
e. Unofficial conversion of personal income to 2000$ by CRS using the deflator for personal
consumption expenditures.
5 National Highway Transportation Statistics, Summary of Travel Trends, 2001 National
Household Travel Survey, December 2004 [http://nhts.ornl.gov/2001/pub/STT.pdf] viewed
August 16, 2006.

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Smith Travel Research.6 This is not consistent with the findings of a study of room
demand in branded hotels over 13 years, which found that gasoline price increases depress
overall lodging demand, with the biggest effect on demand for economy hotel rooms.
Moreover, the study found that resorts were not harmed.7
Supportive of the hypothesis that people will travel despite higher gasoline prices,
but tend to economize, was a late June 2006 PKF Hospitality Research report that there
is “a migration toward more economical accommodations” in the form of limited service
hotels and motels.8 Perhaps contributing to this is the emergence and growth of travel
websites that make it easier to compare room rates and book hotel and motel rooms.
Perhaps a clearer suggestion of a slowdown in tourism is the decrease in the number
of overnight stays at national parks, which began in 2004 (Table 2). Many of the most
popular parks are in the western part of the country, distant from the highly populated
regions of the country and requiring long trips.
The decrease in overnight park stays at the same time that the number of hotel and
motel rooms sold increase appears to be consistent with the observation by many that
people still take trips when gasoline prices rise, but travel shorter distances.
Anecdotal evidence of the effect of increased energy prices on tourism tends to be
mixed, appearing in articles with titles such as “Can’t Stop Guzzling” and “Holiday
Travelers Hit the Road, But Scrimped a Bit.”9
Travel and Tourism Employment
The number of people employed in industries related to travel and tourism, shown
in Table 3, could indicate effects of higher energy prices on tourism. But this evidence
is mixed as well. Employment at establishments providing travel arrangement and
reservation services, while down from 2002, actually was higher in the first half of 2006
than in the first half of 2005, despite the greater ease of self booking available on the
Internet noted earlier. With steep rises in jet fuel providing an additional incentive,
airlines are still striving to economize; the decline in the number of people employed by
airlines at least since 2003 has continued into 2006.
Hotel and motel employment, having recovered somewhat from 9/11, slipped back
in the first half of 2006 from last year’s first half, maybe reflecting a less vigorous tourist
6 Smith Travel Research, Inc. “Monthly Lodging Report - Total United States - June 2006”
[http://www.smithtravelreserach.com], viewed August 13, 2006.
7 “The effects of gasoline-price changes on room demand,” Cornell Hotel & Restaurant
Quarterly, August 2003.
8 PKF Hospitality Research,, “Summer 2006: Hotels Profit, Guests Pay,” News Release, June 27,
2006 [http://www.pkfc.com/common/news/PR2006_0627.aspx] viewed August 13, 2006.
9 Peter Coy, “Can’t Stop Guzzling,” Business Week, July 31, 2006; and Jeff Bailey, “Holiday
Travelers Hit the Road, but Scrimped a Bit,” The New York Times (late Edition - Final) May 30,
2006.

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season. In marked contrast, however, employment at amusement and theme parks
continued in strong fashion; a revival that began in 2003.
Table 3. Employment in Selected Industries
Related to Travel and Tourism
(thousands)
% Change 1st Half
Industry
2002
2003
2004
2005
2006 from 2005a
Travel arrangementsb
252
235
226
224
1.9%
Air transportation
564
528
515
501
-3.9%
Hotels and motelsc
1,424
1,410
1,427
1,438
-0.5%
Amusement and theme parks
134
133
139
149
7.7%
Total of aboved
2,374
2,306
2,307
2,312
-0.5%
Source: Bureau of Labor Statistics (BLS), data from “Employment and Unemployment” database
on BLS website [http://www.bls.gov/data] viewed August 13, 2006.
a. Based upon data not shown separately.
b. Travel arrangement and reservation services.
c. Includes casino hotels.
d. Because only selected industries are shown, this does not represent total employment in travel
and tourism.
Outlook
Whatever has been the case until now with respect to any effect of sharply increased
energy prices on tourism, key economic and other factors have not improved. Prospects
for lower crude oil prices, and lower gasoline prices, have not improved. Stricter security
measures may well, over time, dampen airline travel at least for a while. And the Middle
East remains a generator of uncertainty despite the recently established cease fire between
Israel and Hezbollah.