Tuesday, June 10, 2008

Big Vehicles Stagger Under the Weight of $4 Gas -- Total Cost of Ownership

To consider a vehicle just by its up-front cost might be misleading as to which vehicle is the more expensive. The Tesla Roadster has an eye-popping price of nearly $100,000 but a big pickup truck like an F250 has a more normal price of $50,000. However what about the total cost of ownership? Add up all the costs over the life of the vehicle, the fuel, the maintenance, the insurance, the license fees, etc. This NY Times article claims that the rising cost of fuel is a hidden cost which is what's driving people towards more efficient vehicles.

If gas remains near $4 a gallon, as many analysts expect, a big vehicle like the F-250 will cost $100,000 for an owner who keeps it for a typical amount of time (five years) and drives it a typical amount (15,000 miles a year). The gas alone would cost about $30,000, up from about $10,000 in the 1990s.

This kind of analysis has to do a projection of what the future price of gasoline will be. Since it's difficult (folly) to predict the future what they're doing is guessing, educated, sure, but still a guess. In any case it's interesting to think of the total cost versus the up-front cost. What's required is to construct a model for the total cost, it's the purchase price, plus the cost for the interest on the loan, plus the cost of insurance, the cost of maintanence, the cost of gasoline, etc. You can see if there is a rise in one of those factors in the model then the total cost of ownership will rise. And of course the cost of gasoline has risen dramatically over the last two years.

Just a few years ago when gasoline was a lot cheaper this total cost was lower. The gasoline portion of this model was minuscule enough that most people ignored its effect on the total cost of the vehicle.

But this focus on cost misses a very important point. Namely: the use of oil produces carbon dioxide, which is heating up the planet and could eventually cause all sorts of problems. Those problems are not accounted for when you look solely at the cost of ownership. The environmental cost is not measured by anybody anywhere, yet it is a cost that effects all of us.

Our environment is filled with poisons that result from the use of gasoline, for example. This causes a greater incidence of disease. There is a real cost to us to treat those diseases but that cost is not attached to the cost of oil.

To the extent that the use of oil produces carbon dioxide which causes a heating of the planet, this too is not accounted for in the cost of oil. And to put a dollar cost on the environment would presume that you could buy another planet if you only had enough money. Uh...

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