Tuesday, December 8, 2009

Gas Milage - How Much is Good Enough?

A friend of mine just sold a perfectly good and reliable "paid for" car for a pittance and bought a brand new car for nearly four times the amount he sold his old car. Why?

"Gas Mileage" he said.

He sold a reliable car that got maybe 25 MPG in favor of a new car rated at over 30 MPG. Is this a sound transaction?

The short answer: NO.

Gas mileage, as I have noted before, is a funny thing. The higher your gas mileage goes, the smaller the incremental savings are. The big savings in gas mileage are found in going from a 10 MPG gas hog to a 20 MPG sedan. The savings in going from 20 MPG to 30 MPG are half as much and from 30 MPG to 40 MPG even half again.

Many economists believe that the figure of gallons per hundred miles is a far better way of determining gas mileage. If we compare the mileage of several hypothetical vehicles, in terms of miles-per-gallon and gallons-per-mile, we can see why.

The average American drives about 15,000 miles a year. One way to really save on gas is to drive less - and people can, easily slicing 10-20% of their driving miles each year. The price of gas has fluctuated wildly in the last few years, from $2 to $5 a gallon. For our examples, lets assume an average of 15,000 miles a year driven and gas a $4 a gallon.

CAR# 1 HUMMER-Like SUV
Gas Mileage: 10 mpg (10 gallons per hundred miles)
Gallons per year: 1500
Cost of gas for one year: $6000

CAR #2 LARGE SEDAN
Gas Mileage: 20 MPG (5 gallons per hundred miles)
Gallons per year: 750
Cost of gas for one year: $3000
Savings over Car #1: $3000 (50% cost reduction)

CAR #3 MIDSIZED SEDAN
Gas Mileage: 30 MPG (3.33 gallons per hundred miles)
Gallons per year: 500
Cost of gas for one year: $2000
Savings over Car #1: $4000 (66% cost reduction)
Savings over Car #2: $1000 (33% cost reduction)

CAR #4 COMPACT SEDAN
Gas Mileage: 40 MPG (2.5 gallons per hundred miles)
Gallons per year: 375
Cost of gas for one year: $1500
Savings over Car #1: $4500 (75% cost reduction)
Savings over Car #2: $1500 (50% cost reduction)
Savings over Car #3: $500 (25% cost reduction)

CAR #5 HYPER-MILER
Gas Mileage: 50 MPG (2 gallons per hundred miles)
Gallons per year: 300
Cost of gas for one year: $1200
Savings over Car #1: $4800 (80% cost reduction)
Savings over Car #2: $1800 (60% cost reduction)
Savings over Car #3: $800 (40% cost reduction)
Savings over Car #4: $300 (20% cost reduction)

Note that the increase savings when going from Car #4 to Car #5 are almost laughable - a mere $300 a year. The 75 gallons in fuel saved won't affect the world economy much - or the environment. Fuel savings and cost savings drop off non-linearly as mileage increases.

But the cost of getting ever-increasing fuel mileage does not increase linearly. Engineering required to get hyper-mileage often means resorting to more and more complex technologies, such as hybrid powertrains. Thus, the cost of building such vehicles (and their resultant purchase price) is far higher than the cost savings involved, compared to a standard car getting "reasonable" fuel mileage.

A perfect example is Ford's new Fusion sedan. In a standard 4-cylinder model, it gets a reasonable 30+ MPG at a fairly attractive price. The Hybrid version gets 40+MPG, but at a considerable increase in cost and complexity. Is the extra cost of the hybrid drive worthwhile? Probably not, even at $4 a gallon. Add in the complexity of maintenance as the car gets older, and the picture gets even murkier.

The big savings in gas mileage are in going from the 10 mpg "gas hog" to a 20-30 mpg sedan. Back in the early 1980's America did just that, dumping the "full-sized" American car (with under-performing low-compression engines choked with poorly designed smog gear) to smaller cars with smaller engines, with more sophisticated fuel injection. Overnight, average fuel economy in this country shot up from 10 to 20 mpg, dropping demand in half, and thus causing fuel prices to drop.

Today, similar things will happen as people dump their 10 MPG truck-based SUVs in favor of 20-30 MPG car-based SUVs and minivans. The latter provides most of the functionality of the former, with better fuel economy and at a reasonable cost.

Selling a working and durable car to buy a higher gas mileage car is often false economy. Unless you are driving an 10 MPG car, chances are, the savings will be minimal. For the average consumer, getting 20-30 MPG is more than sufficient. Savings by going to higher gas mileage levels are minimal.

If you are buying a car, yes, you should carefully consider fuel economy, and walk away from any 10 MPG vehicle, unless you are towing a bulldozer or something. I would shoot for 30 MPG in a newer used car, as down the road, that will provide reasonable economy. But if price is the issue, anything above 20 MPG might be acceptable.

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