High prices and conservation of resources

Like myself, I’m sure you’ve known more than a few people who have recently purchased a new, more fuel-efficient automobile since the spike in gas prices–perhaps you’ve even done it yourself. Because higher  gas prices can encourage less fuel consumption, they can also foster conservation of resources. Although, to be fair, the greater fuel economy may just result in more miles driven, with no net change in fuel consumption. Likewise, the person consuming less gas with a more fuel-efficient car may use the savings to purchase other goods detrimental to the environment. All else equal, though, higher gas prices today will likely work in favor of transferring more oil reserves to the future, and they will tend to benefit the environment by encouraging less driving.

With that said, and since I know several people who have recently purchased newer cars with better gas mileage for financial reasons, I’d like to do the math to see if they made good financial decisions. (Warning: In the following analysis, I assume all other variables to remain constant, such as maintenance costs.)

Someone just resently told me he and his wife were going to purchase a newer vehicle for $10,000 to take advantage of the car’s 35 mpg fuel economy. His present car gets 25 mpg. Let’s say the couple puts 50 miles on the car per day, which is 18,250 miles per year. Assuming gas is $3 per gallon (and it remains $3 per gallon), is this a good financial decision based just on fuel economy? I say, no!

Here is how it works out assuming constant gas prices into the future at $3, no interest costs (they pay cash for the car), and constant miles per year of 18,250:

With the old car getting 25 mpg, the couple will consume 730 gallons of gas in a year, which is $2,190 at $3 per gallon. At 35 mpg, the couple will consume 521 gallons, which is $1,564. The couple will only save $625 per year in fuel costs. Not a good deal considering our assumptions. Plus, the couple says they never keep a car longer than 5 years. The payback time, by the way, is 16 years ($10,000/$625).

They should keep their old car if they are just trying to save on fuel costs. Of course, we could make other assumptions and change the result. For example, assuming $10 per gallon gas could certainly change things, but predicting higher or lower gas prices is close to impossible, so we don’t.

This entry was posted on March 15, 2008 at 11:34 am and is filed under General post. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or trackback from your own site.