Don't Read This Post

Quick, how many of you can tell me:

1. Your cars’ fuel economy in miles per gallon or, even better, gallons per mile.
2. How much you drove in the last year.
3. The cost to fill your tank.
4. Your monthly and annual fuel expenditures.
5. How your cars’ fuel economy sits in relation to other cars in their classes.
6. What your fuel savings in gallons and dollars would be if you switched to a hybrid or other highly economical vehicle.

If a 2006 paper by Thomas S. Turrentine and Kenneth S. Kurani (of the University of California, Davis) is accurate, your score on this quiz may well be zero.

“The vast majority of buyers will throw up their hands and perform no math at all.”

If so, you’re not alone. Much as I hate to admit it, even I could only answer one question (number one) with any degree of certainty; the best I could come up with for the others were rough estimates; and I’m a transportation scholar who makes his living exhorting people to drive more fuel-efficient vehicles. Turrentine and Kurani found surprising (or not) evidence that when it comes to fuel economy, car purchasers make decisions that are very, very different than what you would get from the rational, profit-maximizing consumers that populate many economic models.

First, the paper found that recent car purchasers and prospective buyers rarely even mentioned fuel economy as a factor in their decision. (The main exception was hybrid owners, who were considered separately; I’ll write about them when I look at altruistic and emotional motivations for fuel conservation, another time).

Car size and capacity were the most important features for buyers. The car purchasers almost never compared the fuel economy of the autos they were considering purchasing. To the extent they made any comparison, it was between the new car and their current vehicle. But this was problematic. Very few members of the sample of 57 households kept any sort of records of their current car’s fuel consumption or how much money they spent on gas. They had only a rough conception of how much it cost to fill up their tank, and many households (19) didn’t even know their own car’s m.p.g.

In addition to a lack of data, the subjects demonstrated questionable mathematical prowess. When asked how much they’d be willing to pay for a hypothetical m.p.g. improvement of 50 percent, respondents were flummoxed. The results were wild guesses that ranged from $0 to $10,000.

Some tried to make a rational calculation, but with poor results. Even mathematically-skilled individuals like finance professionals or computer engineers had little clue. Two thirds of the households never even dreamed of analyzing how long it would take for an investment in greater fuel economy to pay for itself. Only 10 intrepid households attempted the payback period calculation, and 8 of those performed it wrong.

Two lonely households managed a reasonable stab at it — sort of. But even they did not perform the important step of converting future dollars to net present values. (NPV discounts future income — in this case, fuel savings down the road — on the grounds that getting $1,000 ten years from now is worth a lot less to you than getting $1,000 today. This means you can’t just add up the dollars you will eventually save and count them as money in the bank; at the moment you buy the car the real value of the future savings is a lot less than it seems.)

And even the two households who were in the ballpark on the payback question didn’t actually think to make such a calculation when they purchased their last car.

Interestingly, when pressed, respondents tended to seriously overestimate both their gas costs and the potential financial savings from improved fuel economy. They expressed a willingness to pay much more upfront for a more efficient car than the eventual fuel savings would warrant.

And here is where ignorance may be bliss. With the impending arrival of more hybrids and pure electric cars, we have a perhaps once-in-a-lifetime chance to free ourselves from our shackles at the gas pump. And surprisingly, when we make this fateful decision, a bit of individual irrationality might make for greater collective rationality — provided Americans don’t dazzle us with their financial acumen.

Here’s how.

First, thanks to our myopic focus on recent fuel prices when we make car purchasing decisions (those big gas station signs are among the very few bits of data we carry with us into the auto showroom), consumers might make some very good bad decisions. A rational financial calculator would consider not just the general rise in real fuel prices in the 2000’s but the two decades of plunging real gas prices in the 1980’s and 1990’s. However, short memories may make us forget that oil prices can go down as well as up.

True, fuel prices have dropped since the lofty peaks they hit last summer. But the 2008 spike might have seared fuel economy into our psyches, the way traumatic events often do, and this may cause us to behave a bit more “irrationally.” It’s interesting to note that a few subjects in the study did consider fuel economy thanks to memories of the 1970’s oil shocks, which still reverberate in their consciousness 30 years later.

So buyers will have insufficient data and will probably interpret it irrationally; but in a way that promotes concern with fuel economy. Next, throw in some faulty math, which also tends to favor more efficient cars (for example, by omitting the NPV step). Even better, the vast majority of buyers will throw up their hands and perform no math at all, in which case they will hazard guesses that, this paper suggests, may make them pay more for fuel efficiency than they will ever see back.

All of these forces may line up to shift us into more economical but costlier vehicles (e.g. electrics) even when it makes little financial sense to do so — but only if consumers don’t do the math too carefully and don’t realize the dollar savings might not be all they think they are. Of course, there are altruistic motives (concern for global warming) and emotional ones (hatred of the oil companies) involved in the fuel economy calculus as well, but these might not pull the American public along like perceived economic ones might. So let’s all come together in the noble cause of keeping America irrational — and let’s start by keeping this post strictly between us.


M.B.

Hardly a fair analysis since questions 3,4 and 6 fluctuate on any given day with the price of fuel. Might just as well ask consumers to estimate the future cost of oil. As for question five, why should a consumer care? Fuel cost is only one consideration in the equation. My choice will always be a well made, comfortable car with so-so milage over a porly built car too small for my needs.

Jason

Can't say I'm shocked. This explains all the people new buying Priuses and trading in otherwise economical, fully-paid cars. I actually ran the numbers, and just couldn't make it work. Now I understand....

Andy

Your conclusion seems overly optimistic.

You mention early on that "recent car purchasers and prospective buyers rarely even mentioned fuel economy as a factor in their decision," but then, based on their answers to the question of "how much they'd be willing to pay for a hypothetical m.p.g. improvement of 50 percent" you come to the conclusion that they will in fact take fuel economy into account, and in fact too much so for their own rational self-interest.

I'd guess that when you ask someone "how much extra would you pay for feature X (which -ahem- helps the environment)," they're likely to give you an answer that overestimates what they will pay for it when they're back on their own, shopping. Especially so if you consider that they rarely thought of feature X on their own when asked what features were important to them.

hmmm...

When my wife and I bought our last two cars we sat down with our mileage usage info, figured out the savings per year and over the car lifetime for a hybrid and yes, even converted it to NPV.

We agreed with the article: the hybrids weren't anywhere near positive ROI. From the numbers at the time we could only guess that it made sense for some salesmen or something who would be driving many hours per day.

This article makes me feel pretty weird, but then a again it was a very small sample (57 households) and at least a couple of them got close. I'd imagine that in a more relaxed atmosphere at home over the space of a week they might get it right, so maybe 4% of people do the math? That's not so hard to believe...

Brian

It's important to consider ALL costs, not just fuel consumption. So, for example, if an electric car has batteries that cost $10,000 and need to be replaced every 3 years, that needs to be factored in. (If you think 3 years to is too short to be realistic, I have some 2 year old lithium laptop batteries that I will happily sell you for 50 cents on the dollar. And I didn't even drive them every day.)

If I have a 25 mpg car and drive 25,000 miles per year , that's a 1000 gallons a year. For that electric car to make sense financially, gas would have to be well over $3.00/gallon and electricity free just to cover the additional cost of battery replacement.

The best way to reduce overall fuel consumption is to increase the mileage of the worst vehicles. At 25,000 miles per year, a 10 mpg car uses 2500 gallons per year. Increasing efficiency to 25 mpg will save 1500 gallons per year. Subsequently Improving that from 25 mpg to 100 mpg will save only half as much. And it is much easier to go from 10 mpg to 25 than from 25 to 100.

And the best way to encourage this? Raise taxes on gasoline, of course, or (less effective, but maybe more politically palatable) add fuel surcharges to the gas guzzlers.

Unfortunately, it's easier for politicians to promote pie-in-the-sky plans like electric or hydrogen cars than effective plans like gas taxes.

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Michael Nahas

I don't think we should put this on the consumer to do math.

Dodge was selling gasoline options with a strike of $3 with some of its cars.

If every dealer was forced to include gasoline futures with the purchase of the car, you'd see real and efficient change in car buying. Assume each dealer had to include futures for 12000 miles worth of driving for each year of the expected lifetime of the car, minus the cost of that gas at the current price. Sure, consumers would moan when prices go down and the futures are worth negative value, but they also wouldn't complain if prices went up.

The moaning could be avoided by hiding the true cost of gas. There are credit cards that are only useful for buying gasoline. The buyer would just agree to buy the card for a fixed number of gallons at a fixed price every year. Or the futures could be done in form of options, like Dodge did, and the buyer could buy protection against only rises in the price of gas.

Forcing the dealers to make these futures or options available - even if they weren't required for purchasers - might demonstrate to the buying public the real costs associated with owning the vehicle and the risks associated with volatility in the price of gas.

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boughtandpaidfor

i know most of those numbers. I get 24-26 mpg on my 2004 toyota rav4 (I calculate the mileage almost every time i fill the tank), pay $30 to $35 each time I buy gas (depending on how much is left in the tank and how much gas costs that day). drive about 8,000 miles a year, which puts my gas spending at maybe $1,000 to $1,200 per year, or about $100/month.

i've never done the math on a hybrid because it isn't even close to being a good deal. my car was cheap and is paid for. the only cost is gas and maintenance. the cost of a hybrid is somewhere north of 20 grand.

but just for kicks I can do the math now: let's say i could trade my car in for 10 grand and buy a hybrid for 20 grand and get zero percent financing on the 10 grand I would owe (none of that is remotely true -- hybrids are more expsensive and don't come with zero financing -- but work with me).

my new car payment would be $167 per month. my gas costs would drop in half to $50 per month, because my mileage would roughly double to 50 mpg.

current out of pocket: $100 month for gas plus maintenance
hybrid out of pocket: $167 per month for payment plus $50 per month for gas plus maintenance.

see, not even close.

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Amy

Searching for "track gas mileage" reveals multiple websites which can be used to track your mileage, fuel economy, and fuel cost. I use mpg tune.

Gogojoseph

So, since you don't exactly state a clear conclusion, would it be accurate to summarize your thesis as "buy an efficient car (battery powered hybrid or plug-in hybrid) only if you care about the environment, because you shouldn't expect to receive a return of your additional investment?"

masukomi

Hybrid usage fails to account for the creation or disposal of the batteries. You're trading one evil for another. Also, when you compare hybrids to motorcycles and scooters the mileage still sucks.

Even the motorcycles with crappy fuel efficiency get about 50mpg. Yes, many 2 wheeled vehicles put more carbon into the air per gallon of gas but, in using so many fewer gallons, the total carbon footprint still far less. And this is ignoring the carbon produces in the manufacturing of the vehicle, which is obviously far less for a motorcycle or scooter.

The "more efficient cars" really aren't that great when you compare them against the full spectrum of options, and they're quite bad when you take into account the environmental costs of manufacturing and disposing of them.

J Sullivan

1. 34.1 MPG, 6.9 Liters/100 KM.
2. 16015.5 miles YTD
3. $23.92 (avg)
4. $1066.83 YTD
5. I'm right at the median of other cars of my year, type. I am +1.1 MPG versus the EPA estimated average.
6. Its $0.79 if I improved by 1 MPG per fuel up. A Prius seems to average about 47MPG so that looks like $8.69 as a rough estimate.

Of course that's what happens when you ask such a question in a microblogging era to data nerds (who ask such questions about themselves). Fuelly (http://www.fuelly.com/) is Twitter for gas economy geeks. They even have an iPhone app.

Steven F.

I bet you I can answer all these questions and get 100% correct...ready? OK.

1. 0
2. 0
3. 0
4. 0
5. 0
6. 0

Why? Because public transportation and my bike is all I need, and what everyone else should too. No need for complex NPV's, figuring out your personal discount rate (how is someone supposed to do that exactly?) and one could still play the altruistic card.

Problem solved.

Morley

Despite being technological wonders, no hybrid is going to be greener than its cheaper, non-hybrid, relatively-high-MPG counterpart. A hybrid's MPG will never make up for (a) the extra cost of the vehicle, or (b) the exotic metals in the battery, which are mined in a very environmentally-unfriendly way.

rusty

You may recall an argument presented, I believe, in this very column some months ago: the greatest savings (in terms of barrels of oil not consumed) come from improvements to economy of the worst vehicles -- the % difference in moving from 10 to 14 is significantly greater than moving from 36 to 48, and given the same number of miles driven, the less-efficient vehicle consumed several times more gas to begin with.

The problem, then, seems to be that the people who would stand to gain most from a more efficient vehicle are driving either 1. very old cars or 2. large light trucks / SUVs. And, since car buyers most often take vehicle capacity into account before economy, it is unlikely that we'll convert many F-150 drivers to a hybrid anything.

I think the biggest gains, then, lie not in changing consumer behavior, but rather in requiring manufacturers to improve their least-efficient models.

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Jared

1. 0
2. 0 Miles
3. $0.00
4. $0.00
5. infinite
6. any change would be negative

This paper (which I didn't bother to read) clearly only applies to car owners, of which I am not in the subset. Otherwise I just scored 100% and completely skewed the results.

Mike

+1 for Steven F. I don't have a car, I don't need one, and I'm astonished by anyone who thinks they do. Cars are the downfall of America, and those who get rid of their cars and live in mixed-use urban areas are ahead of the curve.

larry kapner

No one can answer a question concerning the cost of fuel.
It varies wildly from fill-up to fill-up.

Ralph Shohet

Remarkably, you do not mention the environmental (and energy) cost of creating a new vehicle. While the assay of innumeracy you cite is sobering (and a bit difficult to believe) the underlying theme of your column, that gas efficiency should be a predominant consideration for environmental reasons, is insufficiently considered.

alan

Is it altruism to see the connection between environmental degradation and it's impact on our own quality of life, perhaps our very existence, or enlightened self-interest?

Gale

Happy to report that the last time I made a vehicle purchase (Oct 2008) I actually put together a spreadsheet that made all of the pertinent calculations mentioned above, and even considered NPV.

I used it to rank the vehicles we were deciding between by "true" cost of ownership (less insurance, maintenance, etc.). Then my wife was able to review my rankings and know by comparison the marginal cost for other feature in otherwise similar vehicles.

While we didn't go with the cheapest or most efficient, we did make a much more prudent decision.

Just the inner accountant in me. Though I don't know of anyone else who's done the same.