I was talking with someone on the bus. Apparently their friend was trying to rationalize buying a gas guzzling automobile on the rationale that fuel is now cheap. Sadly this person is probably not alone. Quite a few people anecdotally have been doing this. It is apparently in our very flawed human nature.
Apparently in the US, Americans buy more premium fuel when gas is cheaper, negating a significant percentage of the savings. The article noted that this was not rational behaviour and that consumers were not behaving as per the very flawed economic model of a rational utility maximizer (does anyone actually believe these models to be true any more)? In addition, most vehicles do not require premium fuel nor do they benefit from it.
Equally irrationally, the low prices of oil have driven up sales of SUVs and pick up trucks for families that do not need them. That is what I would like to explore in this article.
Predictions that oil prices are expected to be low for the next few years
These are projections. Nobody really knows that for sure. It could remain that way or get even cheaper. Like any projection, there will be a lot of uncertainty involved in that prediction. Like any prediction, there are a series of assumptions and if those assumptions do not prove to be true, then we could see them totally dis-proven. History is filled with so many incorrect predictions.
Alternatively, prices for fuel could rise again if oil prices soar. There could be many causes, from political instability in a major oil producing region of the world, to the concerns about peak oil finally ringing true, in which case, peak “easy to get” oil has occurred, while the rest is not so easy to get (and therefore expensive, both monetarily, along with a poor energy return on investment). A major unexpected event could very easily send fuel prices up.
Also, it is worth noting that low oil prices for Canadians are no longer translating into lower prices at the pump. There are simply too many forces to discuss what affects your final price at the pump (which to be honest would be worthy of a volume of books).
It is not oil prices that also affect fuel costs. Gas taxes are a significant percentage of total costs at the pump. There have been calls to increase gas taxes. This is largely to pay for the aging infrastructure across much of the Western world, especially in the Anglo nations. It is something that I personally strongly support, as our infrastructure has begun to show strains due to age and other challenges. Regardless of your political views though, any increases in fuel taxes could lead to higher prices.
There are other costs
Large gas guzzlers will likely be more expensive to insure (it depends on the model), to maintain (not just fuel costs, but also costs for maintenance and any repairs you may have to deal with). They may also represent a significant percentage of a person’s pay.
The big issue is whether or not a person can afford them and the idea of opportunity cost. By afford, I mean, is someone already living at the margins? A few months ago, when I visited a local TD branch, I sat with the investment adviser for a few minutes. He told me that quite a few home buyers had bought in during the low interest rates and were interest rates to rise, would be in danger of losing their homes. They were operating at the margins. Likewise, an automobile is a huge percentage of a typical household’s total income and if costs such as insurance premiums were to go up, that will significantly increase the total cost of ownership of the vehicle, leaving less money for anyone else.
If you are already operating at the margins, it will not take much to fall behind on payments. If something happens, such as illness, loss of employment, or something that causes a rise in fuel costs, that might be the straw that breaks the camel’s back, so to speak. The challenge here is that for those falling behind on payments could lead to late penalties, and an endless stream of interest charges. Once you are in the hole, it can be very, very difficult to dig yourself out.
Keep in mind that if you do find yourself in the “hole”, your credit score may be damaged and it could affect your other prospects such as obtaining a loan for a home or even your employment prospects.
Vehicles are not investments
The minute you step out of a dealer with a brand new vehicle, it loses around 8-15% of its value. It will lose another 10-20% in its first year. The specifics vary on the make, model, and local market, but cars depreciate very rapidly. Luxury cars tend to depreciate faster, making them a very bad value.
An investment is something that you buy in the hopes of getting profit out of it later on. Perhaps if you are collecting antique vehicles or fine art, that may be an investment.
However most vehicles are not. They merely take you from place A to B. They enable you to make money, but a smaller, more fuel efficient vehicle will do the job just as well for most people. It would be very interesting to see what percentage of truck, gas guzzler, and “V8 engine buyers” actually “need” their vehicles. For example, a construction company likely needs a large pickup truck. A typical family does not, unless it has some very specific uses (ex: carrying heavy loads). They are not the intended audience of my blog article. They know they need the vehicle. I would be shocked if it was more than 50% to be honest that actually needed their vehicles.
Speaking of investments, let me explore the opportunity cost idea I alluded to earlier. The term opportunity cost comes to mind. Recall how large vehicles cost more to purchase and operate. Repairs can also cost more. The problem is, if you not need the vehicle, and you have the money to spare, you could invest it in something that actually does earn a more favorable return.
Personally I’d recommend most people buy a couple of years old to avoid the worst of the depreciation, while keeping a relatively new car (and therefore less likely to incur expensive repair costs). Do your research very carefully.
But … I can sell the car if fuel prices go up!
If oil prices go up, lots of people will be trying to offload their gas guzzling vehicles. This is what happened before the 2008 Financial Crisis. When that happens, you will find the used market flooded with such vehicles, which in turn means that prices for such vehicles will go down. You will have to eat a loss on the value of the vehicle and for the time that you still have the vehicle, while paying the higher than expected gas prices.
The “average Canadian” keeps their vehicle for 8-9 years. If at any time you opt to sell your vehicle, this will be a huge loss to you. Can you honestly say that a few projections mean that the total cost of ownership of a gas guzzler will be low for 8-9 years? Even if you are reading this from the US, where cars are kept for shorter periods, do you want to take the risk of eating a huge potential loss if fuel prices go up?
The environmental impacts
Another matter you should consider in this day and age is the environmental impacts.
Consider the environmental impacts. Global warming is likely to cause the worst extinction in 250 million years if left unchecked. I think that we as a species have a duty to the next generation to make sure that they live the best lives that we can realistically give them. Yeah that sounds cheesy, but I am completely serious about that.
Where I live in Ontario was once controlled by a group of Aboriginals know as the Algonquin. Hundreds of years ago they lived and fought against a collection of tribes known as the Iroquois. The Iroquois had a Seven Generations Ecological Principle. They would consider the impacts of their actions on 7 generations ahead of them. Perhaps in some ways, we still have much to learn from the Aboriginal customs.
Carefully evaluate the pros and cons
This does not mean that you should never buy a large gas guzzling vehicle, You should however be aware of the costs.
- The costs to purchase, insure, and maintain the vehicle
- Can you afford the fuel costs, should fuel costs go back up?
- Is this what I truly want?
For some people, yes, cars are their passion (and believe me, it may not sound like I understand this, but I do as I’ve worked before in the automotive industry). For them, a car is worth it.
I am not saying that you should drive a small beater, but there are very rational reasons to not go to a giant vehicle, if they do not need it. It is incredibly damaging financially or has the potential to be. You need to weigh this very carefully before buying a car.
I think that when most people buy vehicles, they don’t consider these risks. They don’t consider the unexpected costs and only idealize the benefits of large gas guzzlers. They also may not consider the opportunity cost.
Appeals to authority are a logical fallacy and very much against what a Gadfly stands for), but in this case, the current US President, Barrack Obama has a good point. Don’t buy gas guzzlers just because fuel is cheap right now. Politicians often don’t act in the best interests of their constituents, but Obama’s got this one right.