Auto Manifesto

June 22, 2008

Irrational Pessimism & Small Cars?

Gasoline is now around $4 per gallon. Full size SUV sales fell 26.9% between January to April 2007 compared with the same period in 2008. Likewise, compact car sales increased 36.7% in that same time frame. Does this make sense?

Assuming annual mileage of 15,000 miles and $4/gallon of gasoline, here are the operating costs of two hypothetical vehicles:

The more economical car would save $2,000 per year ($167/month). If mileage were reduced to 10,000 miles per year, here’s the difference:

The fuel sipper would save $1,332 ($111/month). Is it worth the extra cost of buying/trading into another vehicle that gets better mileage if you have to pay more for it?

It only makes sense if the fuel savings is not exceeded by the increased cost of the car. In other words, you’re not better off if it costs another $200/month to buy a more fuel efficient vehicle and you only save $150/month in fuel.

Compared with car prices ($16k to $22k for new small cars let’s say) it seems a lot of buyers are not going to save money if they’re switching vehicles purely on financial grounds – unless fuel prices continue skyrocket. Then again, people who bought gas-guzzling SUVs probably weren’t rational to begin with.

The fact that the market for small and large vehicles has changed so quickly in favor of smaller cars indicates that buyers are pessimistic, and the market believes fuel prices will continue to rise, much like when snow starts to fall, milk and bread start flying off the grocery store shelves.

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  • I saw a report on CNN about how next year we'll be looking back at these current gas prices as "the good old days" meaning its only going to be going up from here. However, if people keep buying smaller cars then there's a slim chance the prices might come down, right? Or will companies just stop making so many suv's?

    By Blogger Lammy742, At July 1, 2008 at 8:11 AM  

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