Why Skyrocketing Gas Prices are Good for your Finances

The Silver Lining to High Fuel Prices

In the past six years, the price of gasoline has risen from $1.31 per gallon to $3.80, a 290% increase. If you drive the average of 12,000 miles a year and get a relatively efficient 25 miles per gallon, your costs to drive have increased from $628 to $1,824 annually in that time span. For those with gas guzzlers, you’re most likely paying even more than a $1,200 increase. But, there is a silver lining in being resigned to paying higher prices at the pump.

Ultimately, skyrocketing gas prices and heightened environmental awareness are going to result in significant positive changes in automotive technology in the departments of fuel efficiency and lower emission levels . In the last few years, Americans have complained, but ultimately lived with high gas prices as being a temporary ‘road bump’. So they’ve continued to buy inefficient performing vehicles.

This past year, something has seemed to change. Suddenly, the feeling is that high prices are here to stay, and maybe it’s finally time to take fuel economy into serious consideration when purchasing a vehicle. Had gas prices slowly ascended at prices anywhere near inflation, there would be little, if any, pressure for wide sweeping fuel efficiency improvements from consumers. A spike that has sustained is a different story.

Consumers Shaping the Automotive Marketplace

high gas pricesSome resulting new trends have started to emerge now that gas has stayed north of $3 per gallon for an extended period of time. Nothing inspires automakers to alter the direction of their fleets more than actual sales numbers that indicate purchasing trends. When environmental stewards talk, automakers plug their ears and fight back with a vengeance. However, when consumers talk, automakers tend to listen. All you need to do is take a look at year over year vehicles sales through April on some of America’s 20 best sellers, as well as their EPA MPG estimates to see some emerging (and what will most likely be continuing) trends.

Top Selling Vehicles that have Increased in Sales Year over Year

  • Nissan Altima +9.6% (24 mpg city, 32 mpg highway)
  • Ford Focus +29.1% (24 mpg city, 35 mpg highway)
  • Chevy Cobalt +17.3% (24 mpg city, 33 mpg highway)
  • Toyota Prius +22.6% (48 mpg city, 45 mpg highway)
  • Chevy Malibu +22.5% (22 mpg city, 32 mpg highway)
  • Pontiac G6 +22.2% (22 mpg city, 30 mpg highway)

Top Selling Vehicles that have Decreased in Sales Year over Year

  • Ford F Series (trucks) -15.5% (13 mpg city, 17 mpg highway)
  • Chevy Silverado (truck) -20.8% (14 mpg city, 19 mpg highway)
  • Dodge Ram (truck) -24.2% (13 mpg city, 17 mpg highway)
  • GMC Sierra (large SUV) -11.2% (14 mpg city, 19 mpg highway)
  • Ford Econoline (van) -21% (14 mpg city, 19 mpg highway)

Lawmakers Finally get a Backbone (Albeit a Weak One) on Fuel Efficiency

It will be interesting to see what happens now that there is actually financial incentive for automakers to compete to make the most fuel efficient vehicles. Additionally, Congress recently passed legislation that will push manufacturers to meet higher fuel efficiency standards. New cars and trucks will have to meet a fleet-wide average of 31.6 mpg by 2015 (about a 4.5 percent annual increase from 2011 to 2015). Passenger cars will need to achieve 35.7 mpg (currently set at 27.5 mpg) and trucks will need to achieve 28.6 mpg (currently 22.5 mpg).

We already have seen proof of what manufacturers can do when forced to improve fuel efficiency through government regulations. In a World Resources Institute study on The Global Competitiveness in Fuel Economy and Greenhouse Gas Standards for Vehicles, it was found that the U.S. lags fuel efficiency standards against all other industrial world leaders. The following chart, taken from the WRI report shows average MPG and future standards for MPG. In an upcoming post, we’ll also take a look at how GM responded to a simple mandate from the California Air Resources Board.

Fuel Efficiency Standards by Country

fuel efficiency by country

As you can see, the U.S. has plugged along slowly and severely lags all other countries that were measured, including even China by 10 MPG. Let’s set one thing straight, despite claiming that being forced to raise fuel efficiency will be too much of a cost burden, automakers have demonstrated the capability to do so. GM, Ford, Chrysler, and a slew of international automakers have long been able to make fuel efficient vehicles at a profit. They’ve had to in order to sell vehicles overseas because other countries have forced them to.

Why Did it Take So Long to get Fuel Efficiency Standards Improvement?

So why haven’t automakers used the same technologies they use overseas back in the States? It’s simple, Big gas guzzling SUV’s have much higher profit margins than smaller cars and automakers and their lobbyists carry enough weight and cash to have influenced American politicians to not push for tighter standards. Most countries have rules against their politicians being put on the auction block to serve corporate interests under the guise of capitalism.

An added reason for apathy was that gas prices were well under $2 per gallon, and inflationary pressures were held at bay. Now that gas prices have reached almost $4 per gallon, the entire U.S. economy teeters on an inflationary collapse. It’s finally in the country’s best interest to force automakers to increase fuel efficiency standards so that we can reduce our estimated oil consumption by more than 1 million barrels per day and ease worldwide oil demand.

What does this Mean for me?

I know this is a stretch, but let’s assume that improved driving habits and increased fuel efficiency worldwide lead to a stabling of the demand for oil at around $4 per gallon. Let’s also assume that you drive 12,000 miles a year and have no option but to drive that much. How would increased fuel efficiency standards effect you on a yearly basis.

Let’s start with the current average, here in the U.S.:

25 mpg = $1,920 in annual fuel costs

Now let’s take a look at the new standards being implemented in the U.S. over the next several years:

35 mpg = $1,371 in annual fuel costs

That’s starting to sound much better, what if we moved to Europe today?

43 mpg = $1,116 in annual fuel costs

Even better, how about if we moved to Europe in 3 years?

53 mpg = $905 in annual fuel costs.

You can see how tighter regulations, either mandatory or voluntary, can have a huge impact on how much you end up spending on fuel. I strongly believe that we are beginning to see some action taken in the marketplace in response to the recent sustained spike in the cost of gasoline. These changes will have a positive long term impact on your finances.

One thing we didn’t take into consideration is worldwide demand for oil and the inevitable increase to come from emerging market countries. The odds are demand and prices will trend upwards, so we’ll need to take a look at things that we can do to additionally combat high prices. Look for an article on this in the next few weeks.

Fuel Efficiency Discussion?

  • How do you feel about the lack of an effort on behalf of our government to compete in fuel efficiency on a global scale?
  • Have higher prices pushed you to buy a more efficient vehicle or will it affect your next purchase?

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