Gasoline and diesel are pretty cheap commodities most of the time and represent a minority cost of owning and operating a vehicle. For example, if you drive your car 15,000 miles a year and your car gets 30 miles to the gallon, at today's price of about $2.25 a gallon you will be paying $1,125 per annum for fuel. On the other hand, when $1.25 per gallon fuel comes around, as it does from time to time, you will be paying $625 per annum for fuel.
While most consumers can afford either $625 or $1,125 per annum per fuel, the variability between the two seems to hit pocketbooks disproportionally hard. Consumers don't know what to expect from month to month and year to year, and therefore have to factor in the risk of a price spike in their spending decisions. They have to reserve more of their income in case the price of gasoline goes up.
Higher degrees of confidence in the expected expense may be valuable to consumers. Indeed, they may be willing to pay more for the entire fuel proposition on average. I wonder if Detroit is factoring in this potential willingness when it rubbishes the long-term viability of hybrid cars. Consumers may be willing to spend more per month on their car loan to pay for the additional electric motor and batteries in part because it will reduce the variability of their fuel expenses.
On a related note, the cost of owning an old used car versus a new car follows the same principle. Many people will decide to get a new car when the variability of the maintenance expenses becomes too high for their tastes. On an overall basis, a $2,000 occasional expense may well be worth paying for a dirt cheap set of wheels. But that expense isn't scheduled and it may throw a kink in all but the most stalwart of pocketbooks. People go out and buy new cars all the time under such circumstances.
Comments