Monday, May 12, 2008


There is an interesting post on the Freakonomics blog today. It concerns a new program Chrysler is offering buyers of vehicles that have marginal to poor fuel economy. These vehicles would have to be discounted considerably to sell at current fuel prices.

My comments are below. Read the original post. There are already quite a few comments.

Dear Steven Levitt,
A few comments concerning your post "$2.99 Gas".

"I believe consumers systematically exaggerate the importance of gas prices to their budgets. The typical American just doesn’t spend that much money on gas."

Below is another way of looking at fuel cost impact on consumers.
Average miles of 12,000 per year.
21 miles per gallon @$2.10 = 10 cents of fuel per mile. Cost per year, 12,000 miles. @ $2.10 = yearly cost of $1,200.
21 miles per gallon @ $4.20 = 20 cents of fuel per mile. Cost per year, 12,000miles. @ $4.20 = yearly cost of $2,400.

Where in the household budget does this $1,200 come from? Certainly not from a HELOC [Home Equity Line of Credit]. Possible answer: Consumer credit cards. Other readers may want to look into this.

Ways this could be worse for a group of drivers, perhaps 10% of total.
  • Driving a vehicle that gets less than 21 MPG [16 MPG?]
  • Driving more miles per year [20,000?]

This group will see the costs below.
  • @ $2.10 a gallon, 16 MPG, 20,000 miles per year = $2,625
  • @ $4.20 a gallon, 16 MPG, 20,000 miles per year = $5,250

This group sees a > $2,000 increase in yearly fuel costs. Certainly not a paltry sum.

A very interesting article can be found at
A few selected sentences are below.
  • "SUV sales for the month of April alone fell 32.3 percent from a year earlier and small car sales rose 18.6 percent."
  • "For example, wholesale prices of used small cars increased from $8,480 to $9,240 between December and March as gas prices rose from $2.98 to $3.22 per gallon."
THE MARKET is indicating that small cars are more valuable. Consumers are responding to fuel price signals.

Regarding the credit card program that Chrysler is offering. This is just a financial product. There are few to no barriers that keep Ford and GM from offering the same product. The credit card issuers are probably having high level sales meetings with them right now. The Chrysler gas program could and probably will be matched in days and weeks [just like 0% financing and employee pricing programs].

"Average New Vehicle Gets 21 MPG" [2006 data]

The number of miles driven per year is assumed to be 12,000 miles for all passenger vehicles."

Thanks for covering this timely and interesting topic.

David Damore

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