Variable vs. Fixed Costs of Driving
Posted by Glenn on May 2, 2006 - 9:21pm in The Oil Drum: Local
...on an annual basis, the cost of gasoline is nothing compared with the cost of capital depreciation on your car. Here are the numbers from AAA's latest survey of the annual costs of car ownership:$3,392 -- depreciation
$1,425 -- gasoline (@ last year's 2.40 a gallon)
$926 -- insurance
$735 -- maintenance
$716 -- auto loan finance charges
$150 -- tires
$490 -- other
$7,834 -- total
So gasoline accounts for a mere 18% of the annual cost of owning a car. Judging by the public outcry over $3 gasoline, you'd expect that gas prices are 85% or so. So why is everyone so obsessed with gasoline prices? Why doesn't congress propose giving rebates for auto insurance or for auto depreciation?
Read the whole thing here and then comment on what policies you think would help increase the price elasticity to gasoline prices.
A few thoughts that come to my mind are making insurance costs based on the number of miles you drive instead of being a fixed monthly cost no matter how much you drive. One company Zipcar is making the whole car driving experience a variable cost by the hour or day.
Personnel
Classic posts
Archives
- November 2008 (1)
- August 2008 (1)
- July 2008 (4)
- June 2008 (4)
- May 2008 (3)
- April 2008 (1)
- March 2008 (1)
- February 2008 (2)
- January 2008 (2)
- December 2007 (4)
- November 2007 (4)
- October 2007 (6)
The Oil Drum: New York City archives
- September 2007 (3)
- August 2007 (2)
- July 2007 (3)
- June 2007 (8)
- May 2007 (1)
- April 2007 (8)
- March 2007 (2)
- February 2007 (3)
- January 2007 (5)
- December 2006 (5)
- November 2006 (12)
- October 2006 (10)
- September 2006 (9)
- August 2006 (14)
- July 2006 (15)
- June 2006 (11)
- May 2006 (18)
- April 2006 (35)
- March 2006 (14)
- February 2006 (13)
- January 2006 (12)
- December 2005 (17)
- November 2005 (13)
- October 2005 (25)
- September 2005 (36)
License
This work is licensed under a Creative Commons Attribution-Share Alike 3.0 United States License.
Best,
Matt
Depreciation (assuming 5 years * 3392 = 16960, economy car) doesn't make sense if you buy a reliable economy car and keep it for 10 or 12 years. I believe a decently built car can be kept for 20 years if maintained well.
Gasoline could easily be 20%-50% less with even a conventional high-mileage car.
Finance charges don't apply if you save and pay cash.
I guess it is a reasonable thing to look at the 'typical' car owner's expenses, but this illustrates the major problem of the crying need to become 'atypical' and change basic habits. Even if it is changing driving habits to maximize mileage, but better, use the car less or not at all. Tinkering with these numbers avoids addressing the real problem we face of minimizing or eliminating the auto culture.
Depreciation only matters if you sell it.
If I wrecked it now, I'd buy a used car though.
buying used, barring getting a lemon, is probably the most cost-effective way to go, as most of the depreciation has already happened. Also, not being so concerned with spotless finish, etc. but the bare-bones functionality.
i think hyundais are better bought new(dirt cheap!!)
jap cars better used(toyota best)
I really don't get your link between depreciation and repairs - are you saying I'll be forced to sell it after 100,000k, and so the depreciation will matter then? In my case, it won't, because I'll keep it and fix it myself, but of course not everyone will be willing to do that.
One thing to keep in mind is that if you buy a simpler, less expensive vehicle, you have less of an investment to depriciate, and less stuff to go wrong.
There is value, and then there is value. My car is far more valuable than the book says it is. You just can't play the game their way and expect to win - it's rigged in the house's favor.
OTOH, if you own a gas pig, I'd dump it now, even if you get beat up a bit. Can you imagine what the depreciation rate is going to be if gas hit $4? Even if you don't have the cash to pay it off, trade it in on something inexpensive that gets good mileage. That way you won't be stuck with a car that is worthless AND too expensive to drive.
Mine is 4 cyclinder without a turbocharger, that adds a bit to longevity.
My Kia Rio has 50,000 miles on it and has a 10 year/100K warranty on the drivetrain. It's a Year 2001 model I bought at the 50,000 mile mark/5 year mark. 2 orbits, 2 to go for the warranty. Unfortunately, becuse Kia only recently emerged, nobody knows the long term reliability of Kias. New, they cost about $10,000 and mine was $5,000. With most of the depreciation out of the way it won't be long until I'm flying right-side-up financially. As gas prices go up, it might actually appreciate in value after a while - unlike SUVs. Meanwhile, SUV values will crash n' burn.
I will never see high mileage (31 mpg x 75 gallons/year x 30 years = 70,000 miles more) but I like solid cars :-)
And the energy to build it lies 24 years in the past. I will let the future owner wear it out with biodiesel.
The average diesel can do more than 300 k miles over its lifetime, without any trouble. If you treat a diesel nice, 600 k miles is very well possible without much hassle, the brand doesn't really matter that much. But if you drive only 15 k miles per year, that will take you 20-40 years to do. Which is a bit much.
But if I find one like it, I'll buy it, no question... LPG is one third the price of petrol here in France.
But logically, if you move away from the mean on the higher end like the Luxury autos, depreciation is higher and gas prices are lower as a percentage - these folks may be less price sensitive (assuming they make more money) and those with older cars will have to spend more on maintenance and gas a percentage and will probably be more sensitive.
And I guess you could say that people that lease their car pay their implied depreciation every month.
But I guess the main issue is that once you own or lease a car, you incur a lot of fixed costs that are not dependent on how many miles you drive - except gas.
Even at 20mpg and $3.50 gas driving a mile only costs an incremental 17.5 cents. Most mass transit costs $1-2 for any trip, so the breakeven analysis of a car trip for a car owner is pretty high. And in economics, the marginal cost is all that really matters in the short term.
If you save and pay cash, that you are not paying interest or finance charges but you ARE forgoing the interest you might earn if you put the money to some modestly better use, such as a bank CD. Interest at 5% per annum on the purchase price of $20,000 comes to $1,000 per year.
The number seems like a reasonable average to me.
The truck/car itself is like a house. There is a long-term commitment to pay $x99 per month (x depends on the level of status symbol you want to convey), which includes the finance charges. You can get rid of the truck/car at any point, but there are steep charges if you do, so most people stick it out for two or more years. That means that the $x99 is a sunk cost commitment, like the house payment, paid in monthly installments.
Next, people pay for insurance just like house insurance. There's some price for a year, but they pay either semi-annually or monthly. I would guess that most pay monthly. So there's another sunk cost commitment payed in monthly installments.
Next, there are repairs, maintenance, and everything else but gas, parking, and tolls. These are fairly random events that just happen, or they're so cheap (like oil changes) that they seem that way. They get mentally filed in the "stuff happens, and there is nothing you can do" category.
I suspect that for most people, most parking is just another monthly installment sunk cost. They generally expect, and get, free parking (AKA paid by everyone else.)
So, finally, there are variable costs, such as gas, tolls, and metered or not-prepaid structure parking. People resent these costs because they compete directly with their limited discretionary income. A portion of these costs are probably mentally filed as fixed installment costs as well. For example, people might expect to fill their tank once a week and pay $20 to do it. However, anything beyond that is an un-mentally budgeted cost that takes away from other fun things.
They resent it even more because they have already mentally budgeted $20, so it just isn't supposed to cost $40 instead. They feel ripped off for the remaining $20. Behavioral economists have found that people really hate getting snookered. Gas is only supposed to cost $20 per week, so that extra $20 has to be some kind of theft; "must be corporate greed or something."
A corollary of the mental budgeting, which we have recently seen in action, is that people adjust their mental budgeting over time. So millions of Americans adjusted their idea of the proper amount to pay for a truck/car over the course of the 90s to say that an SUV was a reasonable expenditure. In the short term, people squealed when prices went up to $3 per gallon last summer, but then they calmed right down when prices dropped after that. They had adjusted their mental budget for the higher prices, and felt better when they came back down.
The big problem is still coming. That's when people attempt to reconcile their mental budgeting with their financial budget and realize that they can't make ends meet in the long run. So far they seem to be just adding to their credit/housing debt. I suspect the real budget picture will become clear at about the same time they conclude that gas prices really aren't coming down much.
BTW, 98 Subaru wagon, bought used with 156k miles on it for $3500 cash. My little secret is that this is our third used Subaru wagon, and I know all the things that become problems, and how to head them off. Besides that, we use it almost solely for highway driving. We use the bikes in town.
My wife and I had a bit of a shock when I was writing the above book. We've never had a car payment. We always buy used cars for cash.
owning ..
Triff ..
AAA clearly assumes a new car. The average vehicle on the road is 10 years old. So the average depreciation is maybe $750, not over $3,000.
For the average person, gas prices really are a big % of their cost!
That said, I bought my last car (a very rusted '86 Volvo 240 Wagon for $750; I drove it for 13 months, before its inspection sticker passed muster) captial costs/ month (including repairs) = < $80/month.
That seems a bit high. I was under the impression the number was in the 15% range. Will provide links later.
Best,
Matt
The Australian Democrats had a policy years ago that would have made a difference to car use patterns:
They reasoned that with such a large fraction of costs fixed, the variable component was small and not much of an incentive to cut back on use (you've already paid for insurance, registration etc.).
Their plan was for government to pay for insurance and registration for everyone, with the necessary funds to be raised through fuel tax. Revenue neutral. Politically difficult I suppose.
Depreciation - $0 (perhaps appreciation)
Diesel - 70 to 75 gallons/year unless I take road trip/evac
Insurance - $610/year
Repairs/Maintenance- Varies; about $250/year (some maintenance is time not mileage dependent)
Tires - One set every 7 or so years (rubber rot can come into play)
Other - License tags $20/year, Inspection $15/year, doo-dads I like ???? Perhaps $100 (LED lights were most recent)
I chose a car that I enjoy, that I could keep till I am too old to drive (baring accidents) and a reasonable annual outlay.
No theft or collision, only liability. I'll keep it til something goes wrong I can't get fixed. That's what happened with my 84 Cressida.
Pluses: Save lots of money, comfort, low or no anxiety about dings and such, good handling.
Negatives: Cressida died a few times in the middle of nowhere. But my wife and I are hikers -- no problem.
Bought Cressida for $2800 and had it 5+ years. BMW was $8k and have had it for 4 or 5.
I buy these cars with 130k miles on them--which is nothing. So you spend a couple of K on new brakes, clutch. Big deal.
I'm 65 and have spent much less than 20k on the net purchase price of cars in my whole life. (Net? My daughter totalled an earlier Cressida I HAD insured -- subtract the payout.)
Let me make it simple. Horsepower=Sex. Even the guy who can't remember when he could last get it up doesn't want anyone to know and he needs a V8.
For women it's in reverse. To avoid the terror of mechanical breakdown>>stranded>>rape they get new cars regularly. Maintenance=replacement.
This is why good used cars are always available.
Post-peak there will be crises of sexual identity galore just to keep all the other problems interesting.
US$926 on Insurance equates to about NZ$1500. That's more than I pay for insurance on 2 cars, home contents and house buildings altogether!
UW$735 on maintenance equates to about NZ$1200. I've never even come close to that kind of annual maintenance on any car that I've ever owned, even if I include tyres. I could buy a reasonable 10yo Japanese import car for that price!
And I'd love to know what the "$490 other" is for.
As for fuel, one of our cars is currently costing about NZ$500 annually on petrol, while the other (Toyota diesel people-mover) is costing about NZ$1100 annually on diesel. Combined, thats NZ$1600, which equates to about US$950 (and that's with higher fuel taxes here).
Mind you, we also have a NZ$220 road license, and two NZ$40 WOF (Warrant of Fitness) tests each year.
And I would love to know how many people actually think about how much they 'spend' on depreciation each year. I have never given it any thought at all, but then I have never bought a brand new car, and I've read that 40% of a car's value is wiped in it's first year of 'life'.
is any guide...
Accidents and Litigation?
From BigGavs site (from Crikey) scroll down a bit and you will find a table listing World and Australian concerns - interestingly Aussies are becoming less concerned about terrorism and more concerned about Government/Social Issues (Have they told one porky too many?).
Total Energy Crisis/Depletion of Fossil Fuels/Petrol prices rates between 1 - 8 % depending on time of survey.
The reason why NZ has very high car theft (and also road death) statistics is that we hold the record for the most number of cars per capita of any country in the world.
Oh, and by the way, New Zealand is not part of Australia. Most Kiwis (I'm originally from Scotland) get pretty shirty about being lumped in with the Aussies. Just ask a Kiwi about the famous under arm incident and they will get very hot under the collar!
"New car registrations fell 28.2 percent to 5109 in April from March and were down 7.4 per cent on April 2005."
The "other $490" is for pimp oil, support-the-troops stickers, mega bass in the trunk, and donuts left under the seats.
--------------------------------------------------
And I'd love to know what the "$490 other" is for.
Don't forget blingin' rims and loud exhaust tips.
Average car numbers from story:
* $3,392 -- depreciation
* $1,425 -- gasoline (@ last year's 2.40 a gallon)
* $926 -- insurance
* $735 -- maintenance
* $716 -- auto loan finance charges
* $150 -- tires
* $490 -- other
* $7,834 -- total
The article did not break down it's assumptions but by way of comparison for off the shelf alternatives to the car here are my guestimates for my vehicle, a 2005 Honda "Big Ruckus" 250cc scooter which I bought new last year with peak oil in mind:
Depreciation: I paid $6500 for the bike new from the dealer all taxes in, if we assume that I can sell it used in 5 years for $500 then depreciation is $6000/5 = $1200
Gasoline: They buy 593 gallons of gas for the car @ $2.4/gal. If the car gets 20 MPG then that's 11875 miles traveled. My bike gets 65 MPG (actual, not Gov't numbers) so that's 182 gallons for me to go that far X 2.4 = $438 for fuel
Insurance: I pay $636 for comprehensive coverage with $3 million liability (44 year old married male, sole insured driver, clean driving abstract).
Maintenance: When I bought the bike I included in that price 3 years of aftermarket power and drive train warrantee on top of the 1 year Honda provides, so for 4 of the 5 years I use in this calculation there will be no major maintenance costs to me unless I crash it, but I do allow for 2 hours of shop time per year for tune ups @ $80 /hr = $160. The bike uses 1.2 quarts of oil in the sump, and has a reusable oil filter, I do my own oil changes so lets say $20 per year for lube oil, and I'll allow $150 a year for out of warrantee parts (say a headlight bulb and spark plug here and a drive belt and brake pad there) so that's $330 a year total
Auto loan finance charges: $0, I paid cash for the bike, not sure if that is reasonable for the general population...
Tires: You don't try and save money on Motorcycle tires! Just find the best you can and buy them 'cause your life totally depends on them not failing to perform. The 12" rim IRC's on my bike cost $120 each, if you get a flat you need to replace not plug them, so I'll allow for 1 tire per year total: $120
Other: Hmmm... Motorcycle specific clothing: Helmet, gloves, leathers, replacement due to normal "wear and tear", say $200 per year, cab fare for the winter days when there is ice on the road and it is unsafe to ride on 2 wheels, say $200, whatever else I've forgotten $100 per year total: $500
Fuzzy numbers / emotional stuff: I place a high value on the fun / little adventure I have riding, I also know however that I significantly increase my risk of death or injury in a crash, "just because" I'm on a bike not in a "cage", I'll not try to price this out but call it a wash. We have Gov't health care here in Canada so there is no additional health insurance premium cost to me for being a bike rider, not sure about you all down south there...
My bottom line is $3224 per year with fuel being 13.5% of total
"Average Car" is $7834 with fuel at 18% of total
My bottom line less than half of the Average Car (41%)
Portion of my savings attributable to better gas mileage of my vehicle $987 or 21% of total savings
I find this interesting, first time I've actually run the numbers, I'm saving a lot vs a car, but because all my costs come down, not just because I get 65 mpg as the primary reason.
That is exactly why I bought a used scooter for myself.
Bob Shaw in Phx,Az Are Humans Smarter than Yeast?
Pretty much corresponds to a "poor people" demographic and cost breakdown : buy a car that's at least 5 years old and keep it at least 5 years, or until it breaks. So depreciation is more like $200, etc...
With the nuance that poor people probably didn't buy with fuel economy in mind.
The gas price spike is hitting these people very hard. People who typically don't vote, have no organization or voice or influence, and the situation might well become explosive fairly rapidly. Especially with the Bush administration, which through a combination of ideology and incompetence will do nothing to improve their situation.
I had always functioned on the smart-thrifty mode (my best car was a tiny Citroen AX diesel), but I bought my first ever new car a couple of years ago with a five-year finance plan (it's big and red. I was getting a divorce at the time. Draw your own conclusions...)
What should have been included instead is the monthly bank payment (most new US autos are now financed for 60 or 72 months, with little to nothing down), or the lease payment.
We're insured by State Farm, and that's already the case, at least broadly. They have lower rates for people who drive 7,500 miles a year or less. (I don't know if they have a high-mileage rate, since I'm not a high-mileage driver.)
There are true costs to own values for 2002-2006 cars.These are 5-year estimates (based on 15,000 miles per year).
Not all new 2006/7 models have data yet.
http://www.edmunds.com/apps/cto/intro.do
The cheapest I could find is the 2002 Hyundai Accent.
(sorry I didn't format the following table, which is a paste from Edmunds):
Year 1 Year 2 Year 3 Year 4 Year 5 5-yr Total
Depreciation $619 $542 $477 $423 $380 $2,441
Financing $266 $215 $160 $101 $37 $779
Insurance $1,698 $1,757 $1,818 $1,882 $1,948 $9,103
Taxes & Fees $421 $28 $28 $28 $28 $533
Fuel $1,388 $1,430 $1,473 $1,517 $1,563 $7,371
Maintenance $968 $693 $957 $1,041 $750 $4,409
Repairs $628 $320 $391 $478 $586 $2,403
Yearly Totals $5,988 $4,985 $5,304 $5,470 $5,292 $27,039
Other relatively low costs cars for year 2002 are
Daewoo Lanos S 2dr Hatchback (1.6L 4cyl 5M)
Ford Focus ZX3 2dr Hatchback (2.0L 4cyl 5M)
Toyota ECHO 2dr Coupe (1.5L 4cyl 5M)
Honda Civic DX 2dr Coupe (1.7L 4cyl 5M)
I have a 2001 Echo 5 speed. It's a stripper. It's for inclement weather and emergencies.