The Cost of Driving

Since oil prices began falling in mid-2014, there has been widespread observation of an apparent shift in consumer purchasing habits away from efficient and alternative fuel vehicles and back to gas guzzlers. According to the Wall Street Journal, while SUVs and trucks were only 47 percent of vehicle sales in mid-2012, that share has increased to 53 percent over the past six months. Meanwhile, electric vehicle sales have lost much momentum as gas prices have dropped, with their share of new vehicle sales falling to 2013 levels, while sales-weighted fuel economy has dropped for the first time since new fuel economy rules were implemented in 2007. Swings in gasoline prices appear to have an exaggerated impact on consumer behavior, creating a perception that low gasoline prices are here to stay. This reflects a fundamental misunderstanding of the inherent volatility of the oil market and its boom-and-bust cycles. In fact, it raises a curious psychological question—why do consumers consistently believe the current gas price is here to stay, forgetting the wild swings they have observed in years past? The mental mechanisms behind this behavior are beyond the scope of energy analysts, but it is worthwhile to observe how the car-buying habits of American consumers have changed in recent years, and how a vehicle purchased at one point in time can expose the owner to high risks down the road. At SAFE, we got our hands on a data set from Polk, breaking down the top ten selling new vehicles over the past ten years. We cross-referencing this information with the EPA’s data on fuel economy of these vehicles for their respective model years. There’s room for celebration. Vehicles with fuel economy of less than 20 mpg are colored in red, while those that get over 20 mpg are shaded in blue. When we look at the top-ten most popular vehicles in 2002 and 2014, we see that vehicles that earned less than 20 mpg dropped from almost two thirds of this group to roughly one third. This is great news, not least because it looks like the shift away from inefficient vehicles was driven by more than fuel economy regulations. In 2002, half of the top ten models were pickup trucks or large SUVs. In 2014, that number dropped to three: the Ford F-Series, the Chevrolet Silverado, and the Ram Pickup, formerly the Dodge Ram. A big part of this is probably fuel prices—although gas is inexpensive now, fuel prices effectively doubled between 2002 and 2013. In 2002, the average retail price for regular gasoline was $1.75. In 2012, which saw the highest gasoline prices in the period we examined, the price was $3.71—more than double the 2012 price. In 2014, prices averaged $3.30, lower than 2012 but still well above $3.00 per gallon. Higher fuel costs is part of what has pushed consumers away from vehicles like the Ford Explorer and Ranger, which dropped out of the top ten to be replaced by vehicles like the Ford Escape and Toyota RAV-4. That said, the American love affair with the gas guzzler is far from over. The Ford F-150, a pickup truck with very low fuel economy, was the number-one selling vehicle through this entire period, with the exception of 2007-2009, where the designation fell to the Chevrolet Silverado. Both of these vehicles clock in at 15-17 mpg according to EPA. While there is not much variation among the vehicles that break into the top-ten every year, only three made it every single year: the Ford F-150, the Chevrolet Silverado, and the Honda Accord. 

For a driver considering the two top-selling vehicles in the country, let’s consider where buying a Ford F-series vs. a Honda Accord put the buyer later in the vehicle’s lifetime. The average length of vehicle ownership is 6 years, and the average annual miles driven is 13.5 thousand miles. With these assumptions in mind, you can see that someone who bought a Ford F-150 in 2002 was probably paying about $1,500 for gas over the course of that year, based on average retail gasoline prices. By 2008, that cost more than doubled—to almost $3,200 per year—to drive that same car. Someone who purchased a Honda Accord would face a very different gasoline price scenario. Of course, there’s no point arguing that a Honda Accord and Ford F-series are direct substitutes—one is a family sedan, and the other is a pickup truck. They serve different audiences. However, someone who purchases a Honda Accord not only pays one-third less every year for gas in 2002, with an approximate annual cost of $1,000, but their gas bill only increases to $2,000 in 2008. If you spread the savings out over the lifetime of the vehicles, the difference is even starker. Six years of driving a Honda Accord will run you $8,762.51 in fuel. An F-Series costs $13,435.85. If oil prices had stayed at their 2002 levels, the 6-year cost of driving would have been $6,169.05 for the Accord and $9,459.21 for the F-series. That means the Accord driver wound up paying roughly $2,500 “more” in gas than when they purchased the vehicle, while the F-150 driver shelled out $4,000 more than they probably imagined they would have. The moral of the story here is that buying a gas guzzler when gas prices are cheap can turn into a bait-and-switch. Thankfully, there are positive signs in the market place. As our chart shows, new vehicles purchased more recently are getting better gas mileage, so they are moving lower on the cost curve. Additionally, today’s low oil prices are giving drivers a much-needed reprieve at the pump—at least for now. There’s no saying how long prices will stay low, and IEA is already reporting that demand has picked up while supply is dropping as oil producers scale back, suggesting that oil prices will be moving back up sooner rather than later. In the meantime, sales of SUVs and trucks are surging. Automakers are often happy to steer buyers towards pickup trucks and SUVs, since these vehicles bring in higher margins, but motorists could be in for a rude awakening just a little further down the road.