How much should you pay for fuel economy?

In March, as fuel prices were just at the start of what was to become an incredible two-month 60% increase, interest in the question was high (and I blogged on it). Gasoline held at roughly $3.00 per gallon until a week before Labor Day. Are we re-examining the value of hybrids simply because the price of regular gasoline today is up 90% since 2002 instead of being up 100% since 2002? If so, that does not make much sense.

Why? Because even if we ignore nonpecuniary advantages of hybrids there is no direct connection between the current price of gasoline and the current value of hybrids. The current value of a hybrid vehicle over (or under) the current value of a conventional vehicle is not determined by the current price of gasoline.

Instead, the current (pecuniary) value of a hybrid vehicle over (or under) the current (pecuniary) value of a conventional vehicle is determined by the expected future price of gasoline. The typical car is driven more than 150,000 miles before it reaches its final destination (the junk yard) at age 14. That’s a long trip (from dealership to junk yard is equivalent to driving around the planet Earth at its equator six times; or driving around the (former) planet Pluto it its equator 33 times), and it’s all in the future.

To help car shoppers, I have estimated the value of fuel economy at various fuel economy levels and for a range of plausible future fuel prices and created today’s chart. It works as follows:

Suppose you are trading a car with 25 mpg and considering two cars with three different levels of (actual on-the-road average for your driving style) fuel economy: 35 mpg, and 45 mpg. How much more should you be willing to pay for the 45 mpg car than you are willing to pay for the 35 mpg car? The answer is that you should pay between $1,270 and $3,950.

Here’s how to compute it:
Average the top numbers for the cars ($489+$301)/2= $395. This is the most you should pay for one MPG, and since you would get 10 more with the 45 MPG car than with the 35 MPG car, you should pay no more than $3,950.

Average the bottom numbers for the cars ($157+$97)/2= $127. This is the least you should pay for one MPG, and since you would get 10 more with the 45 MPG car than with the 35 MPG car, you should at least $1,270.

I defined expectations about future prices of fuel in terms of the real price per gallon of regular gasoline half-way through the life of the vehicle: 7 years out. The extremes I chose were $1.50 and $6.50 per gallon. You should be willing to pay more, the higher your 7-year-out fuel price forecast.

Walter is the Director of the Automotive Analysis Division of the University of Michigan Transportation Research Institute (UMTRI). He studies the adoption by consumers and automakers of new powertrain (electric, hybrid, clean diesel, fuel cell, alternative fuels), safety, and telematics technologies. Walter worked for General Motors for 9 years in sales forecasting, product development, marketing, and manufacturing (1993 found him on the floor of one of GM’s component factories). Prior to joining the University, he was Executive Director of Forecasting and Analytics for J.D. Power and Associates. He earned his doctorate in Economics from UCLA in 1983.


  • Guest

    I’m not sure I completely understand your comparison. Are you comparing holding on to your current car against buying a new car that would happen to be a hybrid? If so, than you’re right. You should ride your car into the ground. The hybrid part really doesn’t make much of a difference. But the conclusion you draw would be the same for buying another conventional car instead of a hybrid. Say you buy a new car with a conventional engine that gets 24 mpg like your current car and it’s $3,000 cheaper cause it’s not a hybrid. So that’s $17,000. In this case you save no money from better fuel economy and you’re out $17,000. Conclusion: keep your old car until it dies. Hybrid economics doesn’t enter into it.

  • Guest

    $20,000 11 years ago and $20,000 in 2006 dollars are two very different numbers. your avalon agument is not completely thought through.

  • Guest

    The idea is to justify paying more for a higher mileage car (Hybrid) then for a regular mileage car.

    For example you can buy a Camry with an overall mileage of 26, for $22,000 or a hybrid for 26,000. If the hybrid gets 10 MPG more, then paying $7070 more for the Hybrid makes economic sense according to Walter’s formula.

  • Guest

    Allow me to say how frivolouos this whole blog truly is when: (1) the more oil we use, the more terrorists car suck out of your household income… especially if an economic downturn results (2) the amount of money (per household) spent each year on medical costs related to fossil fuel use far outweight what anyone would pay for a hybrid; and my favorite (3) people don’t hesitate to spend gobs of $$$ on wood trim, satellite radio, and other “must haves”… why not spend that money instead on helpng to clean the air we breath ? (4) purchasing a hybrid sends a clear message to our government and the auto industry that consumers require progressive change (as opposed to thje new GM hybrids that “revolutionarily ” increase economy from 12- 16mpg … what a joke ! ).

    By the above standard, hybrid technology is a downright bargain. If not, get an NGV vehicle that one can refuel from your garage, or the ultimate: ELECTRIC (coming soon regardless of what Detroit says).

    As for those who say switching to electric just “moves pollution”… remember: it is MUCH easier to controll the emissions from afew hundred stacks that it is a few million tailpipes. All it takes is political will.

  • Guest

    And in my first post, paying up to $14,850 for a PHEV makes economic sense according to Walter’s formula. So at $500 per KWH, you could drop in a 20 KWH Lithium Ion battery into a Camry and sell it for around $36,000. And according to Walter’s formula, getting in effect 53 MPG verse 26 would justify the additional $14,000 expense. But since currently the Lithium Ion Batteries cost about $1000 per KWH, the PHEV with 20 KWH Battery would cost $46,000 and would not make economic sense. Hence, no PHEV’s until battery costs come down.

  • Guest

    Allow me to point out the Van and others are mistaken in how PHEV’s would be used: With a PHEV range covering the round trip daily commutes of most Americans (40 miles or less each way), this may remove the gas almost COMPLETELY out of the commuting picture of many. Also… costs are not just drastically cut down by not using any gas, but on less maintenance costs and longer lived engines.

    Although LiIon baterries are prohinbitively expensive now, the price is coming down… the cutting edge technologies being tried out by private entreupeneurs like TESLA motors is just the beginning.

    And again, if the political will is there, strict emissions controlls can be added to all emission sources, including coal. Anoter advantage of electric power vehicles is that the electricity can come from many sources (coal, natural gas, nuclear, wind… even wave energy).

  • Guest

    Hi Common Sense, my use of Walter’s formula represents the economic reality. The “60″ MPG represents the equivlent cost of operating in the AER mode, based on a mileage of .35 KWHs per mile and a baseline cost of 13 cents per KWH. At (.35 x 13) 4.6 cents per mile, you could go 60 miles for $2.75, the cost of a gallon of gas.

  • Guest

    Also note that assuming a 80% drawdown before the ICE kicks in, a 20 KWH would provide 16 KWHs for AER, giving a range of 45 miles. So my calculation reflects how PHEVs would be used.

  • Guest

    And If you’re driving a five speed Insight and getting 72+ MPG (or about 50 MPG better than the average vehicle) that should be worth 5,000 to 20,000 dollars. Sweet! Yes, the last car was 14 years old when I retired it.

  • Guest

    Confused about the various Hybrid mileage claims? The answer is in the assumptions used in the calculation. Based on actual fleet testing Hybrids use about .4 KWH per mile. This includes sitting stopped traffic with the air conditioner running, many accerations, and other factors that make city driving use more energy. Lighter, more carefully designed cars should be expected to use .35 KWH per mile. So if you want to hype the Hybrid mileage, you use .25 KWH per mile, reflective of steady state at optimum speed, say 40 MPH. But why stop there, if you are trying to hype Hybrids. Accepted driving figues say we drive on average about two thirds of the time in short daily commutes, and one third out on the highway for long distances. But we can fudge that and assume four fifths of our miles are short daily commutes within the AER of the vehicle being hyped, and only one fifth of the miles are highway.

    And finally, we can assume a very low cost for the electric from the socket, from “its free” to 7 cents per KWH. But the actually baseline rate in California is 13 cents per KWH.

    Lets do a pure baloney calculation, the electic is free, so we go 300 miles, but only use the ICE for 60 miles, so we burn 2 gallons of gas, and say we get 150 MPG. This calculation is without merit. With this sort of calculation, we could use a 45 MPG ICE and used 1.33 gallons for a calculated 225 MPG.

    So lets return to the real word. Lets use .35 KWH per mile and a cost of 13 cents per KWH. And lets say we drive 200 miles a week within the AER, and 100 using the ICE which gets 40 MPG. Lets say the gas costs $2.50 cents per gallon. 200 miles at .35 works out to 70 KWHs which costs $9.10. This cost is equivalent to (9.10 divided by 2.50) 3.64 gallons.
    In sum, we drove 300 miles and used 2.5 gallons of gas bought at the pump and 3.64 “gallons” bought from the power company for a total of 6.14 gallons, which gives a mileage (300 divided by 6.14) of 49 MPG. You don’t like that number, well plug in .07 cents per KWH and you get (70 x .07) $4.90 cents or (4.90 divided by 2.50) 1.96 gallons. This gives you a total of 4.46 gallons and a mileage of (300 divided by 4.46) 67 MPG. Want it still highter, raise the cost of gas to $3.00 per gallon an then (4.90 divided by 3.00) yeilds 1.6 gallons for a total of 4.1 gallons which gives you a miles of (300 divided by 4.1) 73 MPG.

    Have fun generating any number you want.

  • Mike Tieman

    There is some new technology that cliams to make hybrids obsolete, http://www.omnivalves.com their intake valve gives any 4 stroke engine, low end troque similar to that of an electric motor. With the omnivalve you can dirve around town at RPMs lower then your average idle speed of a hybrid! Very interesting technology!