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FOREWORD This summary report presents a selection of Other .ore . ov/ / ire r.s t Funds Revenue forecasts for the Oregon 1 and scroll down to "Transportation Revenue Department of Transportation. It is published Forecasts." twice a year to assist in financial planning and the formulation of transportation budgets and to Questions and comments should be directed to: support other decision-making activities. The David C. Kavanaugh, Ph. D. forecast is consistent with the Department of Chief Economist Administrative Services' Oregon Economic ~ Financial and Economics Analysis Revenue Forecast (Vol. XXVIII, #4, December, ODOT Financial Services 2008) and the associated baseline macroeconomic (503) 378-2880 forecast from IHS Global Insight Inc. (GII). 550 Capitol Street NE Salem, OR 97301 This document is also available online at: Email: vi .c.~ ~g,T u ttry ~.r. s On the Cover: Oregon drivers may have become somewhat accustomed to price volatility at the gas pump for the past 5-6 years, dating back to 2003. However, the extreme volatility since July 2008 is unprecedented. Fortunately, the direction of the recent price changes presents some very beneficial aspects for the strained budgets of households and for businesses, as well. From a high of well over $4 per gallon last July, prices have cratered to as low as $1.65-1.75 recently. While the ultimate run-up to $4-plus gas helped to precipitate "demand destruction" in the market for motor fuels, it is tempting to ask if there is a flip side in the form of "demand stimulation" with the drastic price declines in oil and gasoline. The answer resides in the structural determinants in the derived demand for motor fuels. Gasoline is used, or demanded, not for its direct, consumptive benefits, but rather as a key ingredient for travel. It is the energy input necessary to provide mobility in travel, which itself is an activity engaged in getting to daily work, personal, and leisure activities. As such, the price of fuel by itself exerts a comparatively small influence on this derived demand within reasonable limits. As we experienced during the price run-ups over the 2003-2007 period, the short-run response due to price was relatively muted. The push in consumption we saw until 2008 was driven by robust economic activity that stimulated the need for travel. While high prices caused drivers to make some short-run adjustments such as tire pressure, telecommuting, and some alterations in mode choice in order to reduce spending on gas, the need to travel to engage in household and business activities more than dominated the effect from higher prices. For example, households continued to travel, albeit slightly less, at high gas prices by making cutbacks in other household spending areas that were not as "essential" or were more discretionary, such as spending on meals out. The pace of overall activity began its nosedive in Oregon in the spring of 2008, and it still remains stuck in a lower gear. This was, and continues to be, the primary source of the slow-down in fuel usage, coupled with high prices. Now, after the sharp decline in gas prices, we are looking at just the opposite situation. Will this stimulate gas consumption by itself? Only slightly. The real effect on usage will be largely registered through the indirect impact of enhanced discretionary spending by households, which may necessitate additional travel. Nationwide, it is estimated that for every $1 drop in retail gas prices that endures over a year, household budgets have an extra $100-13 0 billion more in spending power; a remarkable injection of stimulus not available otherwise. It is the increased travel demand that results which is the pre-dominate effect on the downside, just as it was on the upswing. The price drop for motor fuels also has direct implications for our revenue forecast for the State Highway Fund. These are highlighted in the main report below. 1