Jim writes in with an interesting question:
I’m in the market for a late model used car. I’ve narrowed my desired model down to a handful of choices, each with different gas mileage data. How can you really figure out how much fuel efficiency is worth in terms of dollars and cents? I know how to do the basic math, but it seems artificial. How would you do it?
It’s pretty easy to see how better fuel efficiency saves you money. If gas is $3 a gallon and you have a car that gets 30 miles per gallon and a car that gets 40 miles per gallon, over 100,000 miles, the more fuel-efficient car will save you $2,500. That’s real cash in the pocket.
The only problem with that is the number of variables in the question. How much will gas cost in the future? How long will you drive the car? Does your personal driving habits have anything to do with it?
Let’s look at each factor and see how it affects the importance of fuel efficiency in a car purchase.
How Much Will Gas Cost?
You can usually get a solid estimate of where the price of gas will go over the next year by paying attention to the short term energy forecast from the U.S. Energy Information Administration, but anything beyond that is basically tantamount to gambling. Even within that year, unexpected events can disrupt the price of gas – like 9/11.
So what can a person do when it comes to figuring out the future price of gasoline?
My first piece of advice is to estimate high if you’re in doubt. A high estimate of future gas prices simply means that you’re putting a bit of extra value into fuel efficiency. If fuel prices really are high, you’ll be glad you did it – even if they’re not, you’ll still reap some rewards from fuel efficiency. This is a better scenario than estimating low and being stuck with a gas guzzler if prices spike.
Beyond that, I would assume the trend in the one year forecast will continue for several years. Since it’s the only real “future” number you have to go on, just assume that trend will continue for however many years you intend to own your car.
So, let’s say you’re buying a car and you intend to drive it for about seven years. The fuel estimate report says “crude oil prices contribute to an increase in the annual average regular-grade gasoline retail price from $2.35 per gallon in 2009 to $2.83 in 2010.” That means that a one-year increase will be about $0.48 per gallon.
So, if you’re going to own the car from 2010 to 2016, you’d assume $2.83 a gallon for 2010, $3.21 a gallon for 2011, $3.69 a gallon for 2012, $4.17 a gallon for 2013, $4.65 a gallon for 2014, $5.13 a gallon for 2015, and $5.61 a gallon for 2016. This averages out to $4.17 a gallon over the time you’d own that car. That seems like a high-end calculation to me. However, recall that in 2000, gas prices were often below $1 per gallon, for comparison’s sake.
How Many Miles Will You Put On The Car?
This is a fairly personal calculation, but we’ll stick with the above premise that you’re intending to drive the late model used car for seven years. This is comparable to how long I’ve driven my truck – and it’s very near the point of needing to be traded away.
How many miles do you put on a car in a year? If you have some mileage data, that calculation becomes much easier. Look at your own records and see if you have some data from a year or two earlier that indicates your mileage on a specific date. Calculate how many years ago that was – for example, you might note that the number came from 1.3 years ago – and then subtract that mileage from your current mileage. Divide the difference in mileage by the years since that number and you have a rough yardstick of your annual driving needs.
For the sake of calculations below, we’ll assume that you’re going to be driving 12,000 miles a year. Over seven years, that’s 84,000 miles on the car. Again, this may change based on your own plans and your own auto usage.
How Is Your Driving?
You can use FuelEconomy.gov to find out the fuel economy of nearly every make and model sold in the United States over the past decade or two – it’s an invaluable resource. However, the government uses certain standards to minimize the variation in fuel efficiency from car to car, and your driving is almost assuredly different than those standards.
Here’s a quick test. Fill up your car as much as you can, write down the mileage, then drive it normally for a while. Fill up again and write down how much gas you put in. Fill up again and write down how much gas you added, plus your current mileage. Add up the two gas totals. Subtract your old mileage from your current one. Divide the difference in mileage by the amount of gas you put in, and you’ll get a good estimate of your real world mileage for your current car. It’s not perfect, because it doesn’t vary across seasons too much, but it at least provides some variance for your use.
Now, go look up your current car on FuelEconomy.gov and see what average fuel efficiency your model should get. Then, subtract your calculated fuel efficiency from the government-estimated efficiency and then divide that difference by the government efficiency. That’ll tell you by what percentage your driving habits – plus the conditions you drive in – vary from the government tests. Subtract that from 1 (or from 100 if you’re using percents).
Then, look up the models you’re considering buying and multiply that by the fuel efficiency percentage you just calculated. That new number should get you pretty close to the fuel efficiency you should actually expect to get from the car on the road.
Why do all this? A person who drives aggressively will simply be less fuel efficient than a person who drives conservatively. Thus, an aggressive driver gets less benefit from buying a fuel efficient car. Doing this just calibrates things based on how you drive – and the conditions in which you drive (as winter driving often has a negative effect on efficiency).
So, let’s say that ol’ lead-footed Jim finds that he only gets about 80% of the government numbers out of his car.
A Calculation Example
Jim is looking at a 2007 Toyota Corolla and a 2006 Ford Focus, for example. He looks them up on FuelEconomy.gov and finds that the government estimates that the Corolla gets 31 miles per gallon and the Focus gets 26 miles per gallon. Jim estimates that he drives at about 80% of that efficiency – he drives on the interstate a lot and is a bit aggressive – so that modifies things to about 25 miles per gallon for the Corolla and about 21 miles per gallon for the Focus.
Jim wants to drive the car for seven years and puts about 12,000 miles on it per year. As above, he calculates that the average gas price will be $4.17 a gallon for those years, and he’ll put 84,000 miles on each car.
So how much will the Corolla save him?
In the Corolla, Jim will total up about 3,360 gallons of gas used. At a cost of $4.17 a gallon, that’s $14,011.20 spent on gas over the period. In the Focus, Jim will total up about 4,000 gallons of gas. At $4.17 a gallon, that’s $16,680.
The Corolla would save Jim $2,668.80 in fuel costs over that period, using the estimates we came up with above.
Wait, I Don’t Agree With That One Assumption, So Your Entire Post Is Bogus
The real challenge in making such prediction-based calculations is that they’re based on assumptions, and almost all assumptions about the future are up for debate. The best anyone can do is rely on the best data available and make reasonable leaps based upon that data – and have a rational reason for explaining those leaps.
If you don’t agree with one of the assumptions – or two of the assumptions, or more – change them. Just be sure that you have a valid, intelligent reason for changing it that’s based on some real data or logic. I’ve done my best to explain the logic behind the calculations and information I’ve shown here so that you can use it in your own calculations, or at least have a good starting point for finding your own assumptions.