Save Gas In Rising Prices?

I need a second car, small, with high mpg. I thought a hybrid or even an electric would be a great choice, with gas prices going up the way they are. But after a little research, I realized that is not going to happen.

My current car is a 2005 Scion xB that gets, on average, 28 mpg, well over 30 on a straight, flat highway, no passing, no air conditioning. That was terrific mileage back in ’05, but today I would expect a lot more.

The Toyota Prius is the hybrid mileage leader at 45 mpg, or 40 mpg in the city. I used the more optimistic figure of 45 mpg for my comparisons.

Other hybrids, like the Honda Civic and the Ford Fusion get closer to 40 mpg, less in the city. Some, like the Kia and Hyundai hybrids, are optimized for city, so they get 40 in the city and less on the highway. So I took 40 mpg as my point of comparison for non-Prius hybrids.

Any of those numbers sounds a lot better than my measly 28 mpg, as gas approaches $4 a U.S. gallon. It’s $3.70 right now where I live, but climbing inexorably. I am mentally prepared for $5 gas within a year.

But the clinker is the new car price. Hybrids command an $8,000 premium, on average. I can get a traditional gasoline-only small car that meets my needs for a second car, easily, for $20K. But a hybrid of comparable size, power, and cargo space will cost $28K on average. Sure it’s possible to get into the hybrid game for $24K, but it’s also possible to buy a perfectly adequate gasoline-only car for 17K. I’m comparing at a level of features that meet my needs, and at that level, hybrids are $8K more money.

Maybe I should have bought five years ago when there was a $7,500 tax credit for hybrid cars. But I didn’t have the need then. This is now, and there is no tax credit now. A hybrid buyer just has to eat the hybrid premium.

What about an all-electric? I live in the southwest U.S. where it is 25 miles round trip to the grocery store, 50 to school and 70 to the doctor, so I need plenty of “range,” which only the Chevy Volt can offer. (It’s nominally all-electric, though it has a tiny gasoline “assist” engine). A Volt costs about $40k. There is a tax credit of about $2,500 for an all-electric, so the net is $37.5K. That’s a whopping $10,000 price premium. The other, cheaper electrics don’t have range, so it’s Volt or nothing. Nothing is cheaper.

Going back to the $8000 hybrid premium, wouldn’t I save that much in gas purchases in a short time? Alas, no. I don’t commute every day and often my car doesn’t even leave the garage two days out of the week. My annual mileage is only 8400. So I burn 300 gallons of gas in a year. For $5 gas, that is $1500 a year in fuel (and of course I am not actually paying $5 yet!)

If I had a Prius, I would need only 192 gallons a year, costing me $933, an annual savings of $567. That savings would be nice, but it wouldn’t go very far toward offsetting the $8,000 premium I had to pay to get the Prius. It would take me almost 14 years to break even! The warranty on a Prius is only 5 years.

Ah, but what if the price of gas really went through the roof, which it well could? What if gas ramped up to $12 a gallon? The Prius, with its 45mpg would cost me $2,240 annually in fuel, compared to my current clunker, which would cost an eye-watering $3,600. That’s a monster savings of $1,360 a year for the Prius. Unfortunately, that still is more than a six-year break even.

Of course the savings calculations are even less favorable for hybrids other than the Prius, with their lower mpg ratings. So the obvious conclusion is that the savings in fuel costs I could expect from a hybrid do not even come close to balancing the premium I would have to pay to get the hybrid in the first place. The calculations simply scale up the same problem if I were driving 12,000 miles or more a year. The math just doesn’t work.

I could tell myself I would be contributing to America’s effort to reduce dependence on foreign oil, so maybe that $8000 hybrid premium is worth it. Maybe it is, to some rich person. For me, $8000 is a lot of money to donate just because the U.S. congress is incapable of passing a rational energy policy. No thanks; it’s not worth subsidizing incompetence to that extent.

And here’s the sick part. When I look at the mpg of smaller, lightweight “crossover” vehicles, gasoline-only, like the Honda CR-V, I see mileage ratings like 22/32, which isn’t even as good as I get now with my aging box. The new Scions, regrettably, are bigger and heavier and now get only 22/28, no improvement for me. I could get a tiny 2-seater Like a Scion IQ or a Smart, that will make 37 mpg, as long as I stayed away from the freeway, where I would be crushed like a bug by one of those 18-wheelers smoking north out of Mexico.

Or I could bow to harsh reality, and go for a traditional smaller sedan with mileage only slightly better than what I get now:
Chevy Cruz 28/42
Chevy Sonic 30/40
Ford Fiesta 29/40
Ford Focus 28/40
Honda Civic 29/41
Hyundai Accent 30/40
Hyundai Elantra 29/40
Hyundai Veloster 30/40
Mazda 3 28/40

Is the Fed Political?

The Fed is supposed to be independent of the political process, but in reality that is probably not possible, given that its head is a political appointee. The chairman of the Federal Reserve Board, Ben Bernanke, was appointed by George W. Bush in 2006. You don’t appoint someone who is not on your team.

At this week’s FOMC meeting, the fed had to decide whether inflation was getting strong enough to justify an interest rate hike, or whether such a hike would depress the domestic economy too much. They decided to talk tough but actually do nothing.

By failing to raise rates, Bernanke allows inflation to creep up, saying (in deed, not in words), “we are not worried about it.” That means he doesn’t care if the weak dollar gets even weaker, eaten away by inflation. But since oil is priced internationally in dollars, failure to make a rate hike, even a small one, raises the price of oil. And that’s exactly what happened. It is up as much as $4 a barrel today to around $138.

The justification I have read for the Fed’s decision is that “core” inflation (exclusive of energy and food) is relatively manageable. Of course that begs the question of what planet FOMC members live on where energy and food “don’t count.”

But I think there was a more sinister motive at work, related to the fact that Bernanke is on the Bush team. To raise rates, even a quarter percent, would likely have prolonged the housing crisis. It would have raised mortgage rates and reduced the number of buyers, stifling any nascent recovery in the housing market.

The housing market is a huge domestic political issue. If housing does not recover by November, the Republicans are toast for sure. Inability to sell a house is not an abstract economic issue. It could mean that you are paying two mortgages, or it could mean you have to turn down a job that involves a relocation. If your mortgage is higher than what your house is worth, you can only pray for recovery of the housing market before you are forced into foreclosure. Big corporations like the new home builders are also feeling the pain. Lennar today posted large quarterly losses.

High gas prices hurt voters too, especially the less well-off who pay a higher percentage of their income on fuel. One of my students says she pays $130 to fill up her SUV and does that three times a week. That is a serious dent in anybody's budget. (Naturally I want to yell at her: “What are you doing with a stupid SUV?” But that’s like saying to a child who is in a fix, “You should have thought of that earlier!” Not helpful.).

But who is to blame for high gas prices? Why, it’s those pesky Arabs! And slithering speculators. And don’t forget those greasy oil companies!

Obviously then, for Bernanke, if he lets the dollar decline further, oil prices go up further, but it’s not his fault! It’s not the government’s fault. It’s not the Republicans’ fault. It’s somebody else’s fault. Easy choice to make.

But if he had raised rates, even a tiny bit, there would have been an effect on the housing market, probably negligible and short term, but the housing crisis then could clearly be pinned on him. Unacceptable choice. Because that means the housing crisis is the fault of the government and that would have repercussions at the ballot box in November. So Bernanke chose the course that least harms his political party.

Paradoxically, even if his choice was politically motivated, it will have a counterproductive effect. At some point of pain, which we are fast approaching, voters will realize that Republicans have no energy policy (other than to drill for oil on beaches and in national parks). That will kill them in November.

Oil and Tax

The high price of gas has politicians in a tizzy, perhaps more so than ordinary consumers. Sure, the recent price increases are unpleasant, but I haven’t seen riots in the street because of it. Instead, we hear about the demise of the Hummer, not a bad thing. High oil prices also hurt in indirect ways, such as higher fertilizer and freight costs and pricier airline tickets, but again, it seems like the economy is absorbing the shock so far. We should consider that the price of gas is double, over $8 a gallon in Europe. That seems to be the point at which people, or at least truckers, riot in the streets.

Although it hurts my wallet, I am hopeful that the high price of fuel will continue and eventually strain the economy severely enough that the government is forced to develop a rational energy policy.

The recent Democratically sponsored bill to increase taxes on US oil companies failed to reach the senate floor when it was blocked by Republicans. The bill would have eliminated $17 billion in tax breaks for oil companies who are reporting historically high profits in the trillions of dollars. It seems reasonable on the face of it that they could afford to pay the true costs of production.

The bill also threatened further tax punishment if the oil companies did not invest in new energy sources soon. That provision seems less obvious, as we know that honey works better than vinegar, but again, given that companies are awash in money right now, it could possibly work.

However, if I were a senator, even a Democratic senator, I think I would have voted with the Republicans on this one. The bill was a simple-minded, short term, knee-jerk response to perceived voter unhappiness over gasoline costs, even though it is psychologically satisfying to vilify those fat-cat oil companies. It also wouldn’t hurt in the fall elections to say “we did something for you,” (or tried to, at least).

The proposed senate legislation did nothing to address fundamental issues, such as inadequate refining capacity, unwillingness to pressure the auto industry to raise fuel economy standards, fund alternative energy sources, develop a nationwide plan for oil conservation, and so on. How about a tax on plastic and synthetic fibers?

Closing tax loopholes for the oil companies is a good idea in principle, but it needs to be part of a comprehensive energy policy. For example, would the revenue from the oil company tax go to fund clean coal technology or public transportation? No such ideas were mooted. And on the down side, taxing oil companies right now might inhibit construction of new refining capacity and at the margins, diminish exploration and production among the smaller, hi-tech companies, leading to higher gasoline prices.

Of course oil companies are among the largest political donors in the country, especially on the Republican side, so corruption no doubt played a role in the vote’s outcome. Still, I think the Republicans were on the right side of this vote in terms of long term strategy. The senate bill seemed more of a political stunt than a well though-out solution to basic problems. The price at the gas pump is only a symptom of a much larger energy problem.

I wonder, though, if I could have voted with the Republicans on this one, if I were a Democratic senator. Would it be career-limiting? Would Harry Reid send over someone to break my legs? I wonder how it works when your own party promotes a hare-brained scheme.