The roads are in good condition so far, mostly a very tightly packed gravel, with asphalt as you go through towns. Once we got off of the airport-Reykjavik road, traffic has been minimal. We saw the Route 1 national highway that rings Iceland as we rolled into Hveragerdi, and it looked busy. There isn't much of a shoulder, but so far, cars have been universally considerate and given us lots of room while passing.
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