Wednesday, January 2, 2013

The True Cost of Gas

No, the cost of gas per gallon is not simply the price displayed on a gas station's price board. There are many other costs. And no, I don't mean the cost related to time and driving to and from the gas station.

The costs lie in the devaluation of the car due to increased odometer reading and upkeep. 

Let's take a 2006 Honda Civic sedan for example. Such a car drops in price by an average of 5 cents per mile, according to the Kelley Blue Book website. So with a combined gas mileage of 30 mpg, every mile adds on an additional $1.50 to the price of gas per galon. With a price per galon of, for example, $3.50, the total price including the devaluation-due-to-milage comes out to be an even $5.00.

Ironically, a gas guzzler will give you a much better price per gallon. Let's take for example a 2006 Nissan Titan, with a combined mileage of 14 mpg. Such a car would only add $.70 per gallon for the devaluation-due-to-milage to your bill (assuming the same $.05 per mile devaluation). So with the same gas price per galon of $3.50 the total price becomes $4.20. That's $.80 less than the price per gallon of the Civic. How can this be? To solve the contradiction, we need to compare the net prices per mile. That's $.20 per gallon for the Civic and about $.37 per gallon for the Titan - less than the expected doubling of the price. So the additional price you can expect to spend on a gas guzzler will actually be smaller than what the mileage alone will tell you... Interesting.

But that's not all. Factor in maintenance, such as oil changes and repairs, and the amount you pay per gallon of gas - or rather per mile - increases dramatically. However, the additional cost due to gas you may expect to pay for a gas guzzler as opposed to an economy-car shrinks even further. 

This makes you question whether a car is an investment or a liability. 

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