Tuesday, September 06, 2005

Chart of the Month: August 2005

I got the following question from one of the readers (paraphrased):
Our current mileage reimbursement rate is .$405 per mile. We want it to reflect the current gasoline prices. What would be an equitable rate to request and expect while prices are currently $3.19 per gallon for regular gasoline in our area?
I am not inclined to answer this question directly. I will, however, post a chart showing the costs involved in driving an automobile. The numbers are based on AAA's Your Driving Costs.
(click on chart for a larger image).
The numbers in the chart are not exact, specially because the 1990-2000 data has been adjusted at 1999 $ levels, where as 2005 numbers are in current dollars. The main point of the chart, however, is to show that gas and oil costs are a relatively small cost of overall driving costs. This may help explain, in part, why consumers will choose to buy a big vehicle with a big discount even when gas prices are quite high (think July 2005 auto sales).

Of course, at Three dollars a gallon, gas and oil costs are no longer less than 15% of the overall driving costs. Even at three dollars a gallon, cost per mile of a 25 miles per gallon vehicle is 12 cents, up from 8 cents per mile at 2 dollar a gallon gasoline. Yet, it constitutes no more than 20% of the overall driving costs. As I noted earlier, I expect the prices to be around 3 dollars for a few weeks before settling down to $2.60 a gallon.

Does this provide a large incentive for American consumers to change vehicle purchasing behavior? On a rational basis, I would say NO. Consumer choices are, however, driven by factors beyond economic considerations. Emotional appeal of a high fuel economy vehicle may be high right now, and I am all for people buying more fuel efficient vehicle.


Blogger Mike said...

Depreciating by mile may be required for IRS purposes, but it's meaningless for the average consumer, for whom depreciation over TIME is about a thousand times more relevant.

IE, if I drive my car 10,000 vs 15,000 miles per year, very little difference in depreciation.

5:04 PM  

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