Wednesday, June 11, 2008

The $2.99 gas boondoggle

Recent Chrysler adds encourage car buyers to purchase certain new Chrysler/Dodge vehicles and receive three years of gasoline at $2.99 guaranteed. Given that gasoline prices are currently a dollar higher than this, hovering around $4 a gallon across the nation, this may seem to some like a good deal. But is it?

The official rules for the Chrysler program are rather complex. First of all, you must have a VISA or MasterCard credit card account to participate. Chrysler then provides the buyer with a special card (see graphic) to be used only for gasoline purchases that is tied into that credit card account. This special card provided by Voyager Fleet Systems, which is honored at many types of stations, but not all. So the purchaser will need to know which stations will honor the card and which will not. In my region, a large number of the gas stations on the major north south route have been bought out by the Valero chain; a chain that does not honor the Voyager Fleet Systems card.

If you are one of those people who pay off his/her entire credit card balance each month, then this will have little effect on the cost. But for those who carry balances, using credit cards means adding to balance upon which interest is calculated. Since many people have credit cards with interest rates of 18% or higher, this raises the actual cost of gasoline at least a few cents per gallon (3 to 4 cents) each month above the $2.99.

Secondly, Chrysler has established in advance the amount of gallons it will cover at $2.99 for each type of vehicle, based on average estimates of vehicle fuel efficiency and on the 12,000 miles per year driven by the average American. For example, Chrysler has estimated that the Dodge Durango SUV will get 15 miles per gallon fuel efficiency. Using 12,000 miles per year, Chrysler calculates total gasoline consumption for a year as 800 gallons, and allots for the three years 2400 gallons of gasoline. If the purchaser drives more than 12,000 miles in a year, or gets less than 15 miles per gallon on average, he/she will have to pay full price (using some other method of payment) for any gasoline purchased above the allotted 800 gallons per year. Consumer Reports has tables to show many of Chrysler's estimates of gas mileage efficiency are above those found by their own testing teams.

Third and perhaps most importantly, one can purchase vehicles with greater fuel efficiency, that will cost less to operate even over the first three years, and certainly cost less over the longer life of the vehicle (unless one plans to buy a new more efficient vehicle at the end of 3 years). Simple comparison: purchase a 2008 Dodge Durango SUV that gets on average 15 miles per gallon at an estimated Kelly Blue Book Price range between $25,211 and $33,110 (depending upon trim, options, etc.) or purchase a 2008 Ford Escape Hybrid SUV which gets an average 32 miles per gallon (more than twice as much) for an estimated Kelly Blue Book Price Range between $27,577 and $29,312. At 15 mpg for 2400 gallons over three years, and $2.99 a gallon the Dodge Durango will cost the buyer $7,176 for gasoline. At 32 mpg for 1125 gallons (more fuel efficient), and let's say an average of $6.00 a gallon (let's hope not, but who knows), the Ford Escape purchaser will pay only $6,750 in the same three years.

So in the first three years, while the $2.99 gas program is in place, the Dodge Durango purchaser will actually pay more for gasoline than the purchaser of the more fuel efficient Ford Escape Hybrid. The initial cost of the two vehicles is very similar. So who got the better deal? The real kicker of course comes in that fourth year, when the $2.99 gas is all gone, and now the 15 mpg Durango owner will be paying the going rate for gasoline ($6+ ??), and be hit by a much larger fuel bill than the Escape owner who still has a vehicle that gets 32 mpg. Consumer Reports has made several such comparisons on the relative costs of owning various Chrysler/Dodge vehicles versus more fuel efficient equivalent vehicles. Unfortunately, unlike my own comparisons, Consumer Reports uses only the price of fuel at the time the article was published (in May 2008) which was about $3.68, and does not take into consideration increasing cost of gasoline (as my own comparison above does).

Of course, the really prudent vehicle purchaser might opt for the Toyota Yaris, a conventional gasoline powered subcompact, that also gets 32 mpg, but costs between $12,856 and $15,007. Thousands of dollars saved up front, and years of lower gasoline costs.

So, putting completely aside for the moment, any discussion of environmental issues, the $2.99 promotion by Chrysler does not make good personal economic sense for the individual consumer.


E. R. Dunhill said...

I feel a little bad for the US automotive industry. They've kept so many of their eggs in the "lots of big vehicles with lots of options" basket for so long that they just seem blind to even large market changes. Whether US auto executives believe warnings about climate change or not is their own business. But, what their potential customers believe and can afford is also their business.

Sue said...

As one of my favorite science fiction authors, Robert Heinlein, once wrote: "Everyone has the right to go to hell in their own fashion." He also wrote: "Never underestimate the power of human stupidity."

Everyone should have the right to choose, but is it an imposition on their freedom of choice if some one provides them with information about the actual costs of the alternatives before they choose?