Grim Math: An $11K car is more expensive than a $33K Chevy Volt

The playing field is tilted towards the decisions that require more Keystone XL pipelines and Iraq Wars. Take car purchases.

Ok, so you are cash strapped but want to do your bit for global warming.

  • $11,385 Used Civic
  • $23,000 VW Jetta TDI
  • $23,520 Prius
  • $32,780 Chevy Volt

All about the same size car, the cheapest is the dirtiest, and the most expensive is the cleanest- requiring no gasoline if you drive cars like most people do- less than 40 miles per day.

Guess what most people do? Right. Buy the car that is 1/3 the cost of the clean one. So why does our system have to reward the shortsighted, and penalize those with some sanity about the long term? The answer is, it doesn’t.

What is less visible is that the real cost owning those cars, when figuring the cost of fuel is:

  • $47,412 Used Civic
  • $45,992 VW Jetta TDI
  • $43,208 Prius
  • $42,253 Chevy Volt

Reality tilts the playing field away from the Big Oil reality benders. The facts are that with China, India and the rest of the developing world competing for the same limited world supplies of gasoline, the prices are going to rise as they have.

Gas Price Trajectory same despite Meltdown

Studies show why this is not a temporary price trajectory.

We project that the total vehicle stock will increase from about 800 million in 2002 to over 2 billion units in 2030. By this time, 56% of the world’s vehicles will be owned by non- OECD countries, compared with 24% in 2002. In particular, China’s vehicle stock will increase nearly twenty-fold, to 390 million in 2030.

(Source: NYU study)

Savings compared to a gas vehicle depends on whether you believe gasoline prices will continue the trajectory they have since 2000 (about 12.2% per year)..  Some argue this figure is low, because China and India’s demands are not increasing linearly, but are accelerating,  Today, China alone accounts for 40% of the increase in oil consumption, and India for 10%.  If third world countries don’t build cars and petroleum consuming factories any faster  than they have, then demand will not increase at a faster rate.  The historical 12.2% increase in gas prices per year during the last decade is based on average prices from the US Energy Information Administration. Calculated over the 8 year life of a vehicle, from today’s national average of $3.42, the average price will be $5.29/gallon.  Note this is much higher than figures used in other studies.   EIA’s own projections are much lower.  The Annual Energy Outlook have consistently underestimated oil price increases- The 2005 report forecast the cost of a barrel would not reach $33 until 2025.  The following year, the 2025 estimate was $54 per barrel, a price that had already been surpassed when the report was issued. (AOE2006)  The early AEO2012 report forecasts gasoline prices will appreciate at just  only be $4 to $4.50 by 2035.  (source)

Now, let’s look at the cost of ownership including fuel costs.   Using car calculator such as this one comparing electrics to gas cars, you can check the numbers yourself. Using the spreadsheet downloaded there, plug the $5.29  into cell B12. Now look at the resulting cost of ownership over 8 years in Row 35.

Other studies assume less of a price advantage to electric vehicles.  Kiplinger’s Green Car Calculator assumes an increase of only 3.5% per year on gasoline prices to account for “inflation”, but does not assume prices increases like those seen since 2000.  Still, their calculator shows that the Volt is only $1600 more than the comparable Chevy vehicle (Cruze) over 5 years, and the Leaf is only $800 more than its gas counterpart- the Versa. (source)

So you don’t have to be a liberal/ socialist / environmentalist martyr to do the right thing. In fact, you’d be naive/ stupid not to buy the Volt and keep your $5200. Populist conservatives and pinko environmentalists get the added satisfaction of not putting $21,202 in the pockets of fat cat oil companies.

Still, we know human nature-  $11K car will always beat out the $33K car.  Fortunately there are well known mechanism to help individuals overcome high up front costs in order to achieve lower overall cost of ownership.

One simple way is to reduce the immediate cost of the electrics by subsidizing the cost of the car and then recovering it from a surcharge on electricity used for recharging cars. There are probably many other ways, and which is the best one is a matter for exploration.

If the economic assumptions are have a high degree of certainty, private industry will satisfy this need on its own.  The opposite is true.  Guessing energy prices incorrectly costs futures traders billions in losses every week.  Although banks engage in such futures market trading, they have little interest in making long term bets on such auto loans.  Maybe that would change if the federal government played a part to minimize the risk.


Notes:

The spreadsheet includes cost of electricity plus about a couple dozen other variables you can tweek. Those interested in whether the analysis is serious  should download the spreadsheet and examine the thoroughness of the calculation. The pricing includes not just the cost of electricity (which of course varies locally and can be adjusted- see cell B13. The electricity cost is set at the national average of .11 per KWH. There are other variables which will vary with user such as how much of your driving is long distance. Those who drive more than  increases gas consumption of the Volt.  The Kiplinger data calculations were not revealed.

Amortization schemes:  Lots of implementations are possible- most private sector, some public.  The government is not necessary to do the financing, and there are sound arguments why the implementations should be privatized.

The note was to highlight that this is a classic finance problem- Large up front capital outlays required, and but the economically efficient solution does not happen because of inability to amortize costs over longer time frame. There are many mechanisms to address the financing and I chose one for its simplicity of description. Certainly, the financing could be private as is typically the case. Perhaps this is the preferable route because it would kill another bird with the same stone: it will serve to strengthen bank balances sheets with real collateral, rather that the toxic crap they have choking their books now.

Q: “How would the electric company know which part of your electric use was for the car?”

The cars already meter themselves- their computers know how much they have been charged and so on. What is needed is a wireless transmitter (all on a chip- about $7) to send that info to Electric company meter readers. The wireless meter readers could be placed in major intersections, or utilize the wireless meter readers that electric companies use for homes.

Doesn’t matter where you charge- at home, at work, or at fast charge “filling” stations. If you bought the car with cash, your bill shows no surcharge. If you took the finance option, doesn’t matter if the surcharge goes back to the government or the bank that financed your car. Once the Electric vehicle subsidy portion of the loan is paid off, you pay no more surcharge, and you pay 4 cents per mile for energy while the folks in the Civics are paying 18 cents per mile (see row 37).

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About John JMesserly

Mostly harmless

Posted on 2011-11-05, in climate change, economics, Electric cars, energy policy, Environment. Bookmark the permalink. Leave a comment.

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