Monday, July 18, 2011

Gas Prices and Diminishing Returns

As everyone complains about gas prices, fuel efficiency is the focus of nearly every automaker’s commercials right now.

You’ll remember that this was also the case in mid-2008, as we experienced our first dose of $4/gallon gas. You may also remember that this fell by the wayside shortly thereafter. The speculative oil bubble exploded violently just as the economy tanked, cutting gas prices by more than half (to $1.60!!!) only six months later.

And of course, the market share of SUVs increased significantly as our short memories coincided with dealer overstocks and reduced prices.

I digress.

For now, high gas prices are back, which means fuel-sippers are hot items. But how much money will you save by driving one of these vehicles?

You’ll find that the law of diminishing returns comes into play here.

All numbers assume 12,000 miles/year and $3.75/gallon of gas. The savings are what you would save by upgrading from the previous mileage; i.e. a vehicle with 25 mpg saves $450 per year over a vehicle with 20 mpg.

You can see that the big savings come at the low end of the mpg spectrum: going from 15 to 25 mpg trounces the savings of going from 25 to 50 mpg ($1200 vs. $900).

Just going from 15 to 20 mpg ($750) nearly matches the savings of going from 25 to 45 mpg ($800).

I'm a big fan of saving energy and money (heck, it's the primary focus of my job), but the payback has to make sense. Before you run out and buy a new car, or try to decide between a hybrid and a standard engine, it's worth figuring out how much you'll actually be saving.

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