Sunday, July 16, 2006

Good time to buy gas guzzlers?

Alana sent me an article from MSN.com. It suggests that now might just be a really good time to buy a gas guzzling SUV, from a cost perspective. (It's still a nightmare as far as global warming goes...). It's an interesting article that points out a simple economic fact: large SUVs have fallen out of favour enough that the extra gas money paid to run the vehicle is more than offset by the drop in price.

You can find the article here.

7 comments:

Do-Ming Lum said...

Hi Allan,

I haven't read the article yet, but just doing a little mental arithmetic here:

Assume that where a less gas-intensive car uses 4 tanks, an SUV uses 5 tanks. So if one needs ten extra tanks of gas per year at $80 per tank, and one keeps the vehicle 5 years, then one comes out ahead if the price drop on purchase is more than $4,000.

Note - I am thinking in terms of Canadian gas prices here, and guessing at gas volumes. I have no idea what the actual typical current price is of a tank of gas for an SUV -- I am only guessing.

The $4K cost assumes that gas prices will remain flat going forward. If you change the assumption and say that the price of gas will increase in the future, and if the price increase is gradual such that each extra tank only costs $20 more in each successive year (price doubles by year 5), then the added cost is only $6K.

Looked at in this light, I can see people considering that SUV purchase, if the manufacturer discount is getting to be in the $5K to $6K range or higher.

For what it's worth, I understand that there is (or shortly will be) such a thing as a hybrid SUV. Wonder how it will do against the traditional version?

cheers,
Do-Ming

Allan Goodall said...

Hi, Do-Ming.

It's easier to do the math in miles per gallons and not by the tank, as tank sizes vary.

A couple of people Alana works with get around 17 miles per gallon from their SUV. We did some looking around at smaller SUVs and saw a rating of 29 mpg for the Mazda Tribute. However, that's aggressive and the true rating — with air conditioning on, mixture of highway and city — is probably closer to 25.

The average vehicle is driven 12,000 miles per year in the U.S. At 17 mpg that's 706 gallons. At 25 mpg, those same 12,000 miles would require 480 gallons. The difference is 226 gallons. At US $3.00 per gallon, that's $678. Keep the vehicle for 5 years, and you break even if you saved at least $3,390 on the vehicle.

(In fact, the break even point occurs at less than that. Since most people finance a good chunk of their vehicle, the higher priced fuel efficient vehicle costs more than $3,390 over the lifetime of the loan, even if the sticker price difference is $3,390.)

As you point out, this works only if gas prices stay flat. If they go up, prices need to drop even further to make it beneficial. If they go down you save even further. Prices did drop after the oil crisis in the 1970s. People have been saying that current gas prices won't drop, but that's not what has happened historically.

Alana and I have a 2000 Chevy Tracker as our second vehicle. Tiny, cute little SUV. It gets a horrendous 19 to 20 mpg, regardless of its small size. It doesn't seem to matter if we drive it in the city, on the highway, or with the air conditioning on or off. There is very little difference. Our 2005 Carolla, by contrast, gets about 34 mpg in city driving with the a/c on high. In the fall, when it's cool and no a/c, we have reached 41 mpg on the highway. For this reason, we only use the Tracker as a second car and for light hauling. I don't think we do more than 6,000 miles per year on it. If we had a newer, large gas guzzling SUV to replace it, we'd only have to save $1,700 on the price to break even. As you can see, it's quite tempting.

This is even more tempting when we see that Toyota has made the RAV4 bigger and $3,000 more expensive, effectively pricing it out of our reach.

They are coming out with hybrid SUVs. It still remains to be seen how fuel efficient they will be.

Apparently Honda's Accord hybrid is not selling all that well. It gets 30/37 mpg versus a V6 Accord's 21/30. If you do half your driving in the city, and drive 12,000 miles per year, you'll save about $339 per year driving the hybrid. Since the hybrid costs $3,400 more, you have to keep the thing a decade to break even. This is math that most people can do in there heads, and it's why hybrids are still a very small part of the market.

Winter said...

Get a blue one!

Allan Goodall said...

But red goes faster!

Jason said...

Some of those hybrid SUVs are already on the market. The two examples I looked at are the Ford Hybrid Escape and the Lexus RX400h. According to Ford.com the non-hybrid Escape is powered by a 2.3L engine and gets 23 mpg city and 26 highway. The hybrid version has the same gasoline-powered engine and is rated at 36 city and 31 highway. The hybrid has a CVT transmission while the standard one has the same EPA numbers with either the auto or the manual.
The standard Escape has an MSRP ranging from $19,780 to $25,625 while the hybrid is $26,215 to $27,820. Also, according to Ford.com, the hybrid is eligible for $2600 in tax credits.
Lexus.com lists the 2006 RX400h, which is the hybrid version of the RX330, at $46,755. It has a 3.3L V6, a CVT transmission, and all wheel drive. It is rated at 31 mpg city and 27 highway. The 2006 RX330 was not available. The 2007 RX350 is the new version. It comes with a 3.5L V6, a 5-speed auto, and all wheel drive. It lists for $39,495 base and gets 19 mpg city and 24 highway. There are virtually no visual differences to set either of these hybrids apart from their standard versions. That may be why many people are unaware of their existence. However, they are selling pretty well compared to Honda's hybrids.

Do-Ming Lum said...

How about getting a white one with Starfleet markings? My essential geek nature comes out :-)

Alana said...

Do-Ming

*do not encourage him*

He needs no help with the geek thing...

;-)

Alana