Irrational Gas and Cheap Pickups
Published on 4 Jun 2006 at 11:57 pm |
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Filed under The Cargo Cults of Business, Economics and the Economy.
A posting recently at Coyote Blog, asked whether people are rational about gasoline prices. I’d certainly say they’re not. My brother was recently looking at used cars and noticed a large number of late model full-sized pickups for sale at what he considered bargain prices. His remark was "Buying a new car to save money on gas is never gonna work." (He was also quite adamant on the distinction between buying a new car and buying a used car for this purpose.)
That discussion and the CoyoteBlog post got me to wondering. How many miles would you have to drive the new car before the gas savings would pay off the cost of it?
Such a calculation involves making a lot of assumptions. Let us use a few which simplify things somewhat.
1. We’ll treat it as though the new car is bought with cash (no interest charges).
2. We’ll also ignore the lost interest/opportunity cost of that cash.
3. It seems that the biggest advantage comes from selling off a car with truly terrible gas mileage. So we’ll use the lowest mpg vehicle I can find among the common brands.
4. We’ll use epa combined mpg numbers even though they’re accuracy is somewhat in doubt. They should be OK for comparisons…
5. For the price of gas I’ll use the last price I paid at the pump: $2.89
According to the epa, there’s a Dodge 8.3 litre pickup which gets 11 mpg, or 26.2 cents per mile. So, we’ll start by selling that off. What shall we replace it with?
A. Another Dodge, the Stratus is rated at 25 mpg, 11.56 cents per mile, and list price of $20,500
B. Honda Insight has the very highest rating, 63 mpg, 4.6 cents per mile, and a list of $19,330
C. And, what if we went for best mpg / dollar… something like the Kia Rio at 33mpg, 8.7 cents per mile, and $10,770
A. Saving 14.64 cents per mile, we’ll pay off the $20,500 in 140K miles.
B. Saving 21.6 cents per mile, we’ll pay off the $19,330 in 89,500 miles.
C. Saving 17.5 cents per mile, we’ll pay off the $10,770 in 61,500 miles.
Conclusion: Is it worth it? It depends. Probably not, unless your present vehicle gets truly awful mileage, and you’re willing to buy something cheap with high MPG and keep it for a long time. Even at that, cars don’t last forever, and given the length of time we’re talking about, it probably would make more sense to hold on to the present car and weigh gas mileage along with all the other factors when replacement time rolls around. Or, buy a high mpg used car at a very low price which could pay for itself very quickly.
I don’t claim to be an authority, if you think my math is wrong or I’ve missed something, drop me a note.
-- John
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