The Slippery Slope

I follow financial current events daily. Just about every headline has oil in it (and most also include inflation). Right now it seems like the entire continent is blaming every problem in the world on oil. “Oil is going to push us into a recession.” “Gas prices are killing working-class America.” “Those oil companies are strangling the little guy.” “I can’t afford my car payments because of gas prices” (I guess the repo man will bring the sweet relief!)

Anyway, I’d be careful about how I allow the “Texas tea” become an excuse for all my problems. In so doing, I might invoke the Great American Right: deflecting my personal responsibility.

Even though automobile manufacturers can’t give away SUVs right now, they’re licking their lips because you – yes, you! – need to get a brand new vehicle that will maximize your fuel economy in these very trying times. Why should you pay another dime to fill up that gas hog when you can find a lightweight gas sipper on their car lot? Think of all that money you’ll save at the pump! What are you waiting for?

I hope you’re waiting to power up your calculator so you can do the math; that bubble of enthusiasm is about to pop…

Few people do the math when they make a change “for the better.” Case in point: when buying a new vehicle in the name of better gas mileage, most folks probably don’t realize that they’re going to have to hold onto the car for a long time before the switch pays off.

Let’s assume the following:

A gallon of gas costs $3.75.

You own a 2004 Chevy Trailblazer outright with 60,000 miles (~15,000 mi/year). According to Kelley Blue Book, you could probably sell it for $8,000. Your Trailblazer gets a combined 16 mi/gal (between city and highway), has a 22 gal gas tank, and therefore costs $82.50 (yikes!) to fill up. You drive 15,000 mi/year.

Enough is enough! You’re sick of paying an arm-and-a-leg at the pump so you jump for a 2008 Toyota Prius (from sinner to saint you go). Your Prius is going to cost $23,500, will get a combined 46 mi/gal, and has a 12 gal gas tank costing $45.00 to fill. You still drive 15,000 mi/year. It costs $3,516/year in gas for the Trailblazer, and only $1,223/year for the Prius ($2,293 less). Holy cow! What savings, right?
Hold the phone.

Unless you have the cash to buy the Prius outright, you’re going to have to finance it. After you sell the Traiblazer and put the proceeds toward the purchase price, you finance $15,500 at 6% for 5 years, which comes out to a payment of ~$300/month. That’s $3,600/year. Are you seeing the problem? You’re spending $3,600/year on the car to save $2,293/year in gas. This means that by switching from Trailblazer to Prius you’re spending $1,307/year more, not including increased maintenance costs for hybrids and insurance on a new vehicle. In fact, not until nearly 7 years after you pay off the Prius will the gas savings offset the initial $15,500. So, if you plan to drive the car for 12 years, you’re all set! (The average American keeps a car for 5.7 years, by the way).

Of course, my little case study assumes you don’t pay off the Prius early and that gas prices don’t change. Likewise, I’m not counting the cost of depreciation in this example, but you should be aware that in those first 5 years that you’re paying more for the Prius, the vehicle will lose at least 60% of its value. If you truly wanted to dump the Trailblazer for a more gas-friendly vehicle, you’d be better off going the used route: a 2003 Toyota Corolla. The Corolla will trade practically straight up for the Trailblazer, and you’ll save $1,861 in gas annually.

Sure, oil is a damper on the global economy right now, but without car payments your personal economy can stay afloat. Do the math on car payments – what you pay and what you get (a depreciating asset) – and you’ll see it’s just as silly as buying a brand new Prius for gas economy. Buyer beware.