Could Gas Cost More Than Your Car?

(Photo: futureatlas.com)

A major story on the NBC Today Show was about the sharp rise in the price of gasoline.  One “expert” claimed that, unless you have a very fuel-efficient vehicle, over a car’s lifetime gasoline will cost you more than the purchase price.  Really?  Say a new car costs $20,000, and is driven for 10 years, 12,000 miles/year.  If gasoline is $4/gallon, and the car gets a paltry 24 miles/gallon, today’s average for new cars, gasoline costs $20,000. So, even without discounting, the “expert” is wrong. 

Even if gas were $5/gallon, unless one discounts the future at a rate below 1 percent, the present value of the gasoline purchased is less than the price of the car.  I doubt that there are many new vehicles for which the expert statement is true, even if gas prices rise permanently far above the current price.  I do wish so-called “experts” knew the basics of Econ 1.


Caleb B

This falls under the category of "so what?"

What does it matter if the total cost of fuel is more than the total cost of the car? The total coat of ink is more than the printer. I still need both, so why do I care how the costs are allocated?

Seminymous Coward

It matters because the ratio between the cost of the fuel and the cost of the car determines how much it makes sense to pay for better fuel efficiency. For example, if they were equal costs, a 10% increase in fuel efficiency for a 10% increase in purchase price would be at break even.

Caleb B

Oh, and the price of gasoline is much more likely to rise to $6-7 in year 10, so the static model doesn't really apply here.

Seminymous Coward

You need some strong source for price, number sold, fuel efficiency, and average distribution of miles driven for each model of vehicle. You need good projections for the future cost of gasoline. You need to clarify whether you mean fuel consumed by the original owner only. You need to clarify whether the cost of the car is discounted by the value of the scrap to which it will be rendered.

You are both making the mistake of answering a question about which you don't have enough information to draw firm conclusions. Your answer came out pretty close to his without any real basis for your assumptions. Reasonable estimates of those inputs could give different answers, so you need better estimates to make a proper judgement.

Eric

The average american drives around 13.5k miles per year. The average age of a car on the road right now is around 10 years so the typical life of a car would be much greater than 10 years. Correcting those numbers and I suspect that the "experts" claim is on point.

Jaime

You are most likely using a different statistic for a car's lifetime. As of last year, the AVERAGE age of cars on US roads was 10.8 years [1], which suggests that its highly unlikely for the average lifetime of a car to be at 10 years. In fact, it strongly suggests that the average lifetime of a car is much higher, thereby making the statements in the Today Show a lot more plausible. I'll include a report of a cars average lifetime being above 13 years[2].

The 10 years estimate is essentially the average lifetime per car per owner. Now, I did not watch the Today Show, but it seems to me there is more than enough room here for you both to be right.

[1] https://www.polk.com/company/news/average_age_of_vehicles_reaches_record_high_according_to_polk

[2] http://www.articlesbase.com/automotive-articles/what-is-the-average-lifespan-of-a-vehicle-1075068.html

Dave F.

Wow... Hamermesh could have thought this out a little bit more. The equation totally changes based on how far you drive the car, even if we assume 25 MPG (better math)

150,000 miles / 25mgp = 6,000 gallons * $4/gallon = $24,000 ->more than many cars

There was value though to saying 10,000 miles per year as it gives us a cost of $1600 dollars/year in gas, or $125 per month. If we put 20,000 down initially (like with the car) and pulled out $125 per month we would need more than 1.6% interest to make the car cheaper in the long run.

If you use your car longer or buy used there is a great chance gasoline would cost more. If you buy a more expensive car with good MPG you will pay less.

I don't see a guy on a talk show making generalizations any sign that he doesn't understand economics, but that 'discount rates' and 'amortization schedules' really weren't something that the Today Show wanted to incorporate

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C

Prof. Hammermesh's calculations are not convincing given that many households (especially in Texas where he lives) drive significantly more than 12K a year and if they have older cars, get lower gas mileage (especially in the city with congestion a factor). Thus, the total cost can be higher than the purchase price (again, many folks buy used cars) and the TV pundit is not clearly and absolutely wrong as the post implies.

Also, I am confused as to why he even makes this post as the much more correct answer is that the total cost of fuel is not a relevant cost to consider (Caleb B's printer-ink analogy above).
Overall, if Hammermesh were in my class, I would tell him to strongly reconsider his thinking or face a sub-standard grade.

Devin Lavelle

The expert is right, the economist is wrong. Sorry.

Your key assumptions are wrong, so, as they say, garbage in, garbage out.

The average car lasts about 12-13 years, not 10. That alone changes your math substantially.
Gas prices will likely increase substantially over the next twelve years -- at a rate far greater than discounting would account for.

If you assume the price of gas increases at 3% per year, which most would call optimistic (it's increased at an average of over 10% per year over the last decade) and discount at 2%, over the life of the average car, the owners will pay $25,280 npv, or more than 20% more than they spent on that $20k car. If you assume what I would consider more realistic, a 5% average annual increase, it's up to $28,223.

I'll grant you there are other issues at play, like the fact that the average new car costs more than $20k, but if the expert is not absolutely correct, although he probably is, it's within a reasonable margain of error and it's not worth nit picking.

Not to be snide, but let's try to keep this at a higher level than Econ 1.

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Jason

When the Volt came out, I ran the numbers on how long it would take to break even on gas savings versus buying a regular gas car.

The $20,000 markup on the Volt over similar sedans can buy a WHOLE lot of gas!

This expert wishes he was right, but he's not.

James

Depends entirely on how you choose to define similar. The Volt's MSRP is $39K. If you think a Prius (MSRP $24-30K) is similar, you're right. If you think similar is say a Cadillac CTS ($39-50K) or a BMW 3-series ($37-45K), you get a very different answer.

fancycwabs

Your assumption of 12,000 miles a year is the point where your analysis breaks down. The actual average is 13,500 (and includes some statistical outliers like teenagers and the retired--working Americans average closer to 15,000). Maybe the "expert" was using those numbers from the Highway Adminstration and not some arbitrary low value.

Michael Peters

Others have pointed out lots of flaws in Hamermesh's counter-argument here, but I'll add another: Car efficiency declines with age. So just because it gets 24 MPG now does not mean it will get that when it is 5 or 10 years old, further increasing the disparity between initial cost and cost of fuel.

Michael Giberson

Even if the claim were true, so what? Is it desirable to have operating costs lower than capital costs for automobile owners, and if so why?

James

Suggest Hamermesh do a refresher course in basic arithmetic, because his own numbers show that the expert is right.

Of course there are a bunch of assumptions in there, as for instance, what constitutes "very fuel-efficient"? Is it that 24 mpg average car, or my 70+ mpg hybrid? Is the cost of the car the sticker price, or the total that a sucker buying a new car on payments will pay? And of course, if you're going to discount the future price of gas, you have to also figure the income you might have made off the money you're paying for that new car. And do you want to guess what the price of gas is going to be next year? Hint: hereabouts it's gone up about 50 cents/gal in the last couple of weeks.

Amanda

Don't most cars last *much* longer than 10 years?