News, views & analysis blogs by: Emily Claeys & Andrew Stolen





Subject

Emily Claeys & Andrew Stolen :
Burning Fuel and Holes in Your Wallet:
A Consumer´s Guide to Variable Fuel Costs

Authors:

Emily Claeys
Materials Engineer, DaimlerChrysler Corporation

Andrew Stolen
Product Engineer, Peiker Acoustic

Abstract
Increasing fuel costs is, without a doubt, a key frustration for those who drive automobiles on a daily basis. Moreover, owners of vehicles with low fuel efficiency suffer the greatest impact. Recent surveys suggest rising gas prices are a major factor in car-buying decisions. This has become reality for the Full-Size SUV market, where sales have declined 14% from February 2005 to February 2006. Although automakers have recognized an increase in sales for a certain truck and SUV models, the overall market decline has led to the introduction of a variety of hybrid gas/electric vehicles. While hybrid gas/electric vehicles have higher fuel efficiency, other costs must be considered. Additionally, some automakers have introduced marketing campaigns for flex-fuel vehicles, or those with the ability to run on ethanol based fuel. As global oil demand increases and political turmoil continues, fuel economy will remain a major issue to consumers and force important vehicle decisions going forward.


Article:

Emily Claeys & Andrew Stolen :
Historical Gas Prices

Over the past five years, there has been a noticeable increase in gas prices at the pump. Using the average price per gallon of regular gasoline tabulated by the Energy Information Administration, this increase can be calculated in terms of a percent. In comparing July of 2000 with July of 2005, consumers realized a total increase of roughly 50%, or measured in average gas prices during the first week of July, an increase of $0.73/gallon of regular gasoline. Although an increase of $0.73/gallon may not seem as significant as the overall cost for a family vacation in July, it does equate to a difference of almost $15 to fill up the average minivan gas tank. For those considering a long trek across the country, the $15 increases could certainly add up.

There are several reasons why we have seen an increase in gas prices over the years. The prices remain fairly steady through the 1990s. Beginning with the year 2000, the prices begin to increase noticeably. Generally speaking, these increases can be explained with the concept of supply and demand. As the demand for gas increases, the ability of the existing refineries and oil wells to maintain supply decreases. Furthermore, this leads to an increase in prices in the oil that is available for sale.

Turmoil in key oil producing countries, OPEC production cuts, and problems with infrastructure are all contributing factors to this principle. A large price peak in 2005 is a direct result from supply issues due to Hurricane Katrina. The dip between August 2001 and August 2002 represents the lack of demand resulting from the 9/11 terrorism attacks.

Consumer Opinions
According to the August 2005 AutoVIBES monthly automotive study performed by Harris Interactive, 59% of U.S. in-market vehicle shoppers have said that gas prices either changed their minds or strongly influenced purchase decisions. This represented an increase of 13% over the previous month, and was an all-time high for this portion of the AutoVIBES study, showing that consumers are increasingly mindful of this component of the variable cost related to the operation of their vehicles. Additionally, 42% of vehicle shoppers indicated that they would consider a more fuel-efficient vehicle should prices rise an additional $.25 over the national average at the time of the study, which was around $2.61/gallon. This illustrates that now, more than ever, consumers are mindful of not only the purchase price of the car that they drive, but the cost of operating that vehicle as well.

Low Fuel Economy Vehicles
Most consumers coin the phrase ´gas guzzler´ to a vehicle with low fuel economy. However, a simple internet search on with the phrase ´gas guzzlers´ results in articles geared primarily towards sport utility vehicles (SUV´s) or trucks. 2006 model year vehicles were selected from four major auto manufacturers: DaimlerChrysler, General Motors, Ford, and Toyota. For each manufacturer, a SUV and truck were selected that average less than 15 miles per gallon (mpg) in city driving.

Estimated annual fuel cost is listed for each vehicle. These estimates were calculated assuming an average of 15,000 miles per year, 55% under city conditions and 45% under highway conditions. A price of $2.20/gallon is used for vehicles that require regular unleaded gasoline, and $2.40 for premium gasoline. Estimated annual fuel cost is a variable cost to consumers. It depends on the total gallons used per year, as well as the price of a gallon of gasoline. Consumers may consider this variable cost when making the decision between vehicles with different fuel economy ratings, as it will be listed on the fuel economy label attached to the window of a new vehicle.

Hybrids
Similarly, the EPA and Department of Energy also have a section in their published Fuel Economy Guide that considers the fuel-related metrics with respect to hybrid electric vehicles. The type of vehicle considered here is one that has a traditional internal combustion engine, but has batteries that are recharged via regenerative braking. The same standards are used for measuring these vehicles including an estimated 15,000 miles per year of travel (55% city, 45% highway), and gas prices are estimated at $2.20 per gallon. It is no surprise that these vehicles are among the study?s best performers, and subsequently offer the consumer some attractive numbers with respect to estimated annual fuel cost.

Variable Fuel Cost Comparison
A computation of the variable fuel cost as a percentage of the base price to tie together the initial investment for a given vehicle, and what it will cost to fuel that vehicle. In this case, of course, the lower the percentage, the better the ´value´ that you are getting with respect to buying and operating your vehicle from a fuel expense perspective. This figure only considers the variable cost of fueling the vehicle, and not other variable cost additions or deletions that might be involved when purchasing a fuel-conscious vehicle such as a hybrid that are discussed later in this article. As expected, the hybrids come out on top of this category (even the relatively expensive Lexus RX400h), while the flex-fuel vehicles end up towards the bottom on this measure. (Flex fuel vehicles are discussed in detail later)

Tax Credits
One incentive which may help offset some of the initial cost in purchasing an electric or hybrid gas-electric vehicle is the opportunity for tax credits. Per the Energy Quality Act of 2005, The Federal Qualified Electric Vehicle tax credit is computed as follows:

´10% of the vehicle´s cost reduced by any section 179 deduction (depreciation and amortization if the vehicle is a business asset), up to a maximum credit of $4,000, for each qualified electric vehicle placed in service before 2006, and 2.5% of the vehicle´s cost reduced by any section 179 deduction (depreciation and amortization if the vehicle is a business asset), up to a maximum credit of $1,000, for each qualified electric vehicle placed in service in 2006´

Additionally, purchasers of ´clean-fuel´ vehicles (a class which can include hybrid gas-electric vehicles) from the following list could deduct $2,000 for the year that the vehicle was first used as specified in the rules for a ´clean-fuel vehicle deduction´:

-Ford Escape Hybrid - Model Year 2006
- Mercury Mariner Hybrid - Model Year 2006
- Lexus RX 400h - Model Year 2006
- Ford Escape Hybrid - Model Year 2005
- Toyota Prius - Model Years 2001 through 2006
- Toyota Highlander Hybrid - Model Year 2006
- Honda Insight - Model Years 2000 through 2005
- Honda Civic Hybrid - Model Years 2003 and 2005
- Honda Accord Hybrid - Model Year 2005

State Tax Incentives for the Purchase of Fuel-Conscious Vehicles:

Variable and/or fixed costs to the consumer can be further reduced in the form of tax incentives and/or direct payments or reimbursements in the following states:

Maine (fixed cost incentive) - If a purchaser is buying a ´clean-fuel´ vehicle for which there is an identical gas-powered counterpart, the incremental cost of the ´clean-fuel´ vehicle is tax-exempt. If there is no gas-powered counterpart, 30% of the purchase or lease price is tax exempt if the vehicle still uses an internal combustion engine, and 50% of the purchase or lease price is exempt if the vehicle is either fully or partly electrically-powered.

Connecticut (fixed cost incentive) - The purchases of natural gas, LP gas, hydrogen, electric vehicles, or hybrid electric vehicles (those with a U.S. EPA fuel economy rating greater than 40 MPG) are exempt from state sales tax.

Colorado (fixed cost incentive) - Purchasers or lessees of alternative fuel vehicles or hybrid electric vehicles qualify for a tax credit in the year of purchase which ranges between approximately $2,100 to $4,700 depending on the make and model and the corresponding fuel economy performance for that vehicle.

Oregon (variable and fixed cost incentives) - A $1,500 tax credit is offered for consumers purchasing alternative fuel vehicles. Additionally, the registration period for alternative fuel vehicles is lengthened to a biennial period and the cost reduced to $27 for each year of the registration period.

Challenges of Estimating Variable Cost
Fuel economy measures, and in particular mpg estimates, may be of particular interest to consumers who carefully measure their variable expenses related to the operation of their automobile. However, one should not create a monthly budget based solely on these numbers without considering how they are derived and the inherent error that can be involved in how they are reported.

As noted in an article by Ann Job in msn.com?s Autos section, the fuel mileage estimates are derived during emissions testing by the individual automakers. This is done so that the automakers can save time and money doing the two types of testing using the same equipment and during the same time slots in their labs. This means, however, that the tests are done on a dynamometer, and not on a real road. The city portion is measured with the driver (with no passengers) alternating between acceleration, braking, and idling, while maintaining an average speed of about 20 mph. The highway portion averages 48 mph, uses no stops, and must be done with a maximum speed of 60 mph. Both of these scenarios can approximate real world conditions, but of course lack a few characteristics that would tie them tighter to everyday driving.

Most people spend at least some of their driving time with passengers in the car; but this is not tested. Most people are subject to speed limits that exceed 60 mph, and could even be averaging in excess of 60 mph on long trips involving a majority of interstate driving. The temperature in the lab is typically between 68 and 86 degrees, which does not account for temperate climates where drivers drive in fall, winter, spring, and summer conditions, or extreme climates where vehicles are always operated at excessively cold or excessively warm temperatures. In fact, if a consumer is using the Environmental Protection Agency (EPA) sticker as the basis for an estimation of the variable cost related to fueling their automobile, they can notice an amount that is overstated in some cases by up to 34%. This can make a large difference in variable costs, and of course this error will increase as gas prices go up, or if the mileage driven by the consumer is estimated incorrectly.

Consumer Reports uses their own results to give a fuel economy estimate for the vehicles that they review. One should also be cautious when using these numbers as well, however, due to the fact that they only give one set of numbers that combine city and highway driving. This could lead to incorrect estimates of this variable cost, especially if the consumer drives in a majority of either highway or city driving, and not an even mix of the two. Consumer Reports does make this estimate by looking at data from real world driving, however, so in that respect they may be closer to the consumer´s variable cost reality.

Moreover, the EPA will be adding tests to their fuel mileage test plan so that greater accuracy can be achieved, beginning with 2008 model year vehicles. These tests will simulate a greater variety of driving conditions, will account for the operation of accessories such as air conditioning and power windows, and will be mathematically adjusted for the affects of heavy loads, hilly conditions, wind resistance, and poor customer care for their vehicles. This should help the consumer to come to a more realistic budget when considering fuel economy and what they will spend on gas.

Variable Costs: 2003-2006
Improvements by auto manufacturers in reducing overall vehicle weight, modifying engine calibrations, or designing vehicles with optimal aerodynamic properties may affect a vehicle´s fuel economy. However, while the auto manufacturers are making these improvements, the cost for a gallon of gasoline has also increased. The average price for a gallon of gasoline from 2003 to 2006 increased $0.65 per gallon.

There is a change in variable fuel cost from 2003 - 2006 for two SUV´s and two trucks. Also included is the Toyota Prius, one of the hybrid vehicles identified earlier. Out of this set of vehicles, the Dodge Durango has the highest increase in Estimated Annual Fuel Cost. This is an example of a situation in which the increase is purely due to the variability in gas prices, as the reported mpg for this vehicle is the same for 2003 and 2006. In 2006, the consumer paid just over 50% more to fuel this vehicle.

Will the automakers keep ahead of the curve in terms of improving fuel economy faster than gas prices increase? According to the Bush administration, they will be forced to try. On March 29, 2006, new rules were announced for auto manufacturers that would force the development of more fuel efficient SUVs, pickup trucks, and vans. The new rules, which cover 2008 through 2011, increase the total mpg that the automaker´s fleet must meet. The Bush administration predicts that this would save 10.7 billion gallons of fuel over the lifetime of the vehicles sold during the period. The new rules not only help reduce our dependence on oil, but also help consumers who own some of these larger vehicles keep a few dollars in their wallets.

Sales Trends
Although there is a noted increase in variable cost to consumers related to vehicles with low fuel economy, automakers have seen an increase in sales for a few SUVs and trucks. During February, Toyota realized a 25% increase in sales for their Tacoma pick-up truck, and an 11% increase for the Tundra. The release of the redesigned Chevrolet Tahoe contributed to a 5% increase for the month at General Motors (GM). Although sales for particular vehicles have increased over last year, the majority of those within the GM SUV portfolio continue to decrease. Moreover, Ford Motor Company saw truck and SUV sales fall nearly 7% during the first two months of 2006. Sales of Ford SUVs in particular, including the Expedition, dropped 20% or more. DaimlerChrysler´s car sales climbed 18% in February, although truck and SUV sales dropped 2%.

A comparison of February 2005-2006 shows a 14% decrease in sales of Full-Size SUVs. Although this information may seem dismal for the auto manufacturers, opportunities for increased sales in other types of SUVs may help the situation. At a Dec. 7, 2005 Banc of America Conference, Geroge Pipas, Manager of U.S. Sales Analysis for Ford Motor Company, stated that sales of crossover SUVs have been trending upward (at a greater rate than the traditional SUVs downward trend) since around 1998.

Alternative Fuel Vehicles
As industry spreads across the globe, the demand for oil will surely increase and push the limits of that which can be supplied, further influencing the upward trend of gas prices to the consumer. Consumers do have several options to counteract this trend. Influenced by recent advertisements by General Motors, some consumers have become interested in alternative fuel vehicles, or those that require ethanol for fuel. These vehicles are typically called flex fuel vehicles (FFV), and require E-85, a fuel blend composed of 15% gasoline and 85% ethanol. Ethanol can be produced domestically from corn and other crops, and could reduce the nation´s dependency on foreign oil.

Vehicles with traditionally low fuel economy and the estimated annual fuel cost associated with the use of E-85. One may notice that the consumer´s out of pocket fuel expense is slightly higher than if the vehicle were fueled with regular unleaded gasoline. This is a result of E-85´s lower energy content. However, E-85 does have a higher octane rating, which will provide for an increase of about 5% in horsepower. In addition, ethanol is less polluting to the environment than regular unleaded gasoline. Currently, a gallon of E-85 averages around $2.20/gallon. Although there are several benefits of E-85, including tax credits, a consumer who is focused on saving money in annual fuel cost may not see flexible fuel vehicles as the best option.

Conclusion
According to the Energy Information Administration, gas prices for 2006 are expected to average around $2.42/gallon for regular unleaded gasoline. Should consumers trade fuel-related variable cost savings for other fixed and variable cost increases? We have identified that flex fuel vehicles do not provide for savings in fuel-related costs, but what about a hybrid?

Choosing a hybrid because of the fuel mileage savings alone can be an expensive alternative in the long-run. According to a recent Consumer Reports article, there are many areas where costs increase from traditional to hybrid vehicles. Their figures showed that after considering the federal tax credits and gas prices rising to around $3 to $4 per gallon, that only two of the hybrid models (Toyota Prius and Honda Civic) actually save you money at the end of five years of ownership. And when the federal tax credits expire, even those two will cost an extra $1,800 and $2,750 respectively. The increased costs come from a number of areas including higher retail prices, a higher depreciation rate (hybrids are projected to lose their value quicker than their traditional equivalents), higher insurance premiums, and higher maintenance and repair costs (particularly at dealership garages where the bulk of hybrid-trained technicians are employed). It follows that the advertisement for hybrid vehicles is targeted at environmentally-conscious customers who may not mind paying the extra price required to purchase a low or zero-emissions vehicle.

Although there are environmental and political benefits to the opportunities with some of the more fuel efficient vehicles, consumers currently do not benefit in terms of variable fuel-related costs. Several factors, including our nation?s political relations, environmental goals, domestic oil development efforts, and even weather patterns will certainly affect the fate of some of our most favorite gas guzzlers.

































































































































































































































































Automotive Industries
Call For Interviews, News & Advertising

x

Thank You

x