What to drive

I have a dilemma regarding what to do about your dilemma. The people I’m talking about are my readers, friends, and relatives who are popping up in my e-mail, asking me questions about whether they should buy a new car, when they should buy it, what they should get, etc.

The dilemma is not that I’m hesitant to opine about such things (Hello! I run a blog about energy and environmental issues. Have we met?), it’s that I can’t provide a meaningful answer to most of these queries without going pretty far out on a limb in making predictions about the price of gasoline, what car companies will be selling in a couple of years, what the US government is likely to do in terms of creating an energy policy (something which we really don’t have currently, unless you consider “What the big, old energy companies want, the big, old energy companies get” to be an energy policy), and how other consumers will react. To put it bluntly, I have to either refrain from telling people what I really think or make a big, steaming pile of assumptions and then draw conclusions from them. I don’t like either option, but I’ve decided to go with the latter alternative.

So, here goes nothin’….

First, the obligatory caveat: If you change your car buying plans based on what I write here, you get 100% of the credit if things go well and 100% of the blame if things go badly. I’m a geek with a blog, and if you allocate real money, whether it’s buying a car or investing, based on what I say here, then you’re taking a ridiculously and unjustifiably large leap of faith.

For a long time, I’ve said on this site that when you buy or lease a new vehicle you should get the model within your price range that just barely meets your requirements and delivers the highest fuel efficiency. Yes, people will also take into account brand and even model loyalty, which models come in a really cool color, cup holders, etc., but I’m focused on the e+e issues; those other factors are personal and it’s up to you to decide to what extent they play a part in your final decision.

Based on the e-mail I’m getting it’s clear that that general advice isn’t nearly specific enough. People are asking me about whether they should buy a cheap, non-hybrid or a more expensive hybrid. They want to know whether they should buy a current generation hybrid or wait for one with lithium batteries, and whether they should convert both vehicles in their household to more efficient models or go with one really efficient model and a larger vehicle (like a minivan). Ponder those questions for a moment or two, and you’ll see how all those assumptions I mentioned above come into play.

Hybrid or non-hybrid?

This is the decision I faced in 2006 when I no longer needed my minivan and wanted to buy something that would go a lot farther on each gallon of fossil fuel. I opted for a my often-mentioned Scion xA mostly because I drive so few miles, only about 3,500/year. Unless you make a wildly high assumption about the price of gasoline, I had no chance of earning back the extra cost of a hybrid during the time I would own the car. Also, I plan to replace this car with an EV around 2012, and since I didn’t know what the car market would look like in 6 years (from when I bought the xA), I didn’t want to run the risk of getting hammered by catastrophic depreciation. So, a $14k, four-door mini-wagon from a major manufacturer was a pretty solid pick for me at that time, and I’ve been very happy with it in just under two years of ownership.

In general, the basic economic decision comes down to payback. Figure out how many gallons of gasoline you’ll buy for each vehicle you’re considering, for each year you’ll own it. Multiply those gallons by the assumed cost of gasoline for each year, and total these yearly gasoline expenditures for each car. Low number wins the fuel cost race.

What about trade-in value? And leases?

This is where things get really nasty, on two fronts: Trade-in value today vs. that of the car you’re buying now after however many years you plan to keep it.

If you’re looking to buy a much more efficient car now, then the odds are very high that what you’re driving now doesn’t get 50MPG. With gasoline prices yet to hit their peak in the US for this year, and the resale value on many less efficient vehicles already plummeting, you could get a lot less for your trade-in than you were hoping. If it’s a relatively new SUV in excellent condition, it could be downright ugly.

Conversely (and perversely), the vehicles you’ll get the best deal on for a trade-in are the ones that you’d be far less inclined to want to trade in right now. This is what happens when market conditions change suddenly and “everyone” wants to do the same thing at the same time.

Looking ahead four to six years, you’re deep into the “here be dragons” part of your planning exercise. Perceptions of vehicle efficiency will change very dramatically in the next few years as we see more (and more efficient) hybrids, plug-in hybrids, downsized engines, more diesels, and even electric vehicles hit the US market, all likely by 2011. My xA will look like a gas guzzler when I trade it in for that EV in 2012, and I suspect many of the shiny new hybrids people are snapping up like candy today will have a similar, if not quite as pronounced, perception issue. Fifty MPG? And it doesn’t even have an option to plug in???

This argues strongly for buying a “transition car”, something that will do the job and minimize your depreciation risk while the car business radically reshapes itself in a few years. Which brings me to another long-standing recommendation: The less efficient the vehicle you need, the more seriously you should consider leasing instead of buying. Leases are calculated based on the assumed depreciation of the vehicle, and those assumptions are likely to be laughably wrong for many vehicles, and the most wrong for less efficient vehicles. In crass terms, by leasing a lower-MPG vehicle for three or four years instead of buying it, you insulate yourself from the chance that said vehicle will go off a depreciation cliff during that time, and all the risk remains with the actual owner of the vehicle, i.e. not you.

I haven’t checked lease terms on vehicles in a long time, so it’s possible they’ve already started to adjust upwards to take this phenomenon into account. And if they haven’t, I think it’s a very safe bet that they will, and soon.

Buy now or wait for the Next Big Thing?

People are asking me if they should wait for a plug-in or buy a current generation hybrid. And one did ask about whether it’s worth waiting for lithium batteries, as mentioned above.

By this point in the conversation you can guess that the “should I wait for a plug-in” question is riddled with assumptions. You have to make your own assessment of the price of gasoline in the next few years, the burden of driving your current vehicle while waiting for a plug-in, how soon plug-ins will arrive, what kind of effective mileage you’ll get from them (taking into account how diligent you’ll be in plugging one in and the relationship between the battery-only range and your normal driving schedule), and trade-in value issues, now, in a few years, as well as when you trade-in your to-be-purchased hybrid, plug-in or otherwise. Good thing this stuff is simple, right?

My hunch, and that’s all that it is, is that unless you’ll get hammered on your current trade-in, you should buy a hybrid (or really efficient non-hybrid) now. It seems pretty clear that in the coming years oil and gasoline prices will find more than enough upward pressure from rising demand in China, India, and some oil exporting countries to continue their general upward march, and that nothing will counteract that trend. As a result, your pain at the pump will only increase with your current vehicle, and that could make for a very long and unpleasant two to four years while you wait for a suitable plug-in or EV to arrive. And if plug-ins arrive at a much higher price and/or with lower battery-only range than you assumed, you could find that your expensive wait wasn’t worth it, after all.

X Factors

I know this is a lot to think about, but I think it’s also valuable to mention the X Factors in our immediate energy future. I define an X Factor as anything that could have a large influence on your decision and is also prone to large, difficult-to-assess changes.

The price of oil. While I think there’s almost no chance of a significant, sustained drop in the price of oil, we could be set for a huge increase. Pick your scenario–a new war in the Persian Gulf region, a terrorist attack on a critical piece of oil infrastructure (like the Strait of Hormuz), a hurricane ripping through offshore oil platforms in the Gulf of Mexico, a public policy blunder on par with the US ethanol debacle, or the widespread recognition that the crazy people who think peak oil is real and imminent are right–and it’s not hard to imagine oil reaching prices that make $125/barrel look like a bargain.

Batteries. I have no idea what kind of price/performance the batteries hybrids and EV’s depend on will deliver in a few years. (And I include ultracapacitors in this group, even though they rely on a fundamentally different technology.) We could see a stunning breakthrough that drops their price to the point where a 100-mile battery range plug-in costs $25k, or we could see negligible improvement, which would greatly slow the electrification of personal transportation.

Public policy. Anyone who pays even minimal attention to e+e issues can concoct a whole range of outcomes here, from “enlightened and genuinely useful” to “so bad I wish we had Bush back”. We just don’t know. Personally, I think a revenue neutral (or even positive) feebate program on cars would be a huge step in the right direction, but I’m not holding my breath. Another unknown is how global warming related policies will interact with transportation issues.

Electricity prices. Electricity rates are going up almost everywhere in the US, largely thanks to the rising cost of fossil fuels. I expect prices to keep rising thanks to fuel costs, downward pressure on CO2 emissions pushing us to alternatives, the skyrocketing cost to build nuclear plants, impacts from drought conditions limiting thermoelectric generation, and increased demand from people plugging in cars. But how much will they rise in a few years? Ten percent? Twenty? More? Or will the combination of solar thermal plants, conservation, consumer-sited solar PV, geothermal, etc. hold the line on future cost increases? My very rough guess is we’ll see prices rise quite a bit for the next several years and then flatten out for a while. This will slightly reduce the attractiveness of electrified cars, but it won’t come near making them a bad option, thanks to the rising price of gasoline in the same time frame.

Your personal commitment to conservation. Face it, a lot of people talk the talk but keep driving their SUV’s at extralegal speeds on unnecessary trips. In all of this evaluation and discussion, you can’t overlook your own lifestyle choices. Are you willing to use even a mild form of hypermiling (as I do) to boost your car’s efficiency by 10 to 20%? Will you reduce your miles driven, keep your car in the best running condition possible, and always use the most efficient vehicle available in a multi-car house? Will you really plug in your plug-in as often as you should? In extreme cases, will you move closer to work?

Summary

I’ve been predicting for a long time that we would encounter a period of confusion in the car market as many more technologies compete, forcing buyers to make a lot of tough decisions. What I didn’t see was gasoline prices rising as quickly as they have recently, making that situation all the more urgent for pump-pummeled consumers.

Above all else, make a personal commitment to conservation no matter what forms of transportation you use, and take a broad, forward-looking view of the situation when buying a new car. You won’t get every detail right, just as I’m sure I’ve said some things above that will prove to be embarrassing in a few years. But you’ll still be much better off thinking about all these technology and economics issues than buying based on color options and the number of cup holders.