It makes intuitive sense that when gasoline prices plummet, people will be less interested in hybrids and small vehicles and more interested in gas-guzzling muscle cars, SUVs, and pickup trucks. And we’ve got the data to prove it.
Michael Sivak and Brandon Schoettle at the University of Michigan Transportation Research Institute do a great monthly report on the average fuel efficiency of the fleet of vehicles sold in the U.S. each month. The measure soared from 20.1 mpg in October 2007 to 25.8 mpg in August 2014—an impressive increase of 28 percent (yay, America!). But since that high point, the new fleets of cars launched onto America’s highways have been getting progressively less fuel-efficient. In September, the measure stood at 25.2 mpg. The decline would likely have been significantly worse if not for the persistent and incremental improvements in the baseline efficiency of cars and trucks. (Thanks to new technologies, such as start-stop and Ford F-150 pickup trucks being built with aluminum instead of steel, the floor under mpg is generally rising.)
Of course, this consumer behavior is entirely predictable and seemingly rational. The price of gasoline is loudly and persistently advertised in public; we all notice its changes. When drivers see gas at $4.50 a gallon, they realize it makes economic sense to purchase a vehicle that gets better mileage than the one they’ve been driving. When they see gas nearing $2 a gallon, they’ll fret less about mpg and be more easily seduced by factors such as power, size, comfort, and utility.
Alas, this behavior is also economically inefficient and idiotic—a classic case of consumers being fooled into long-term decisions by transitory market signals. Yes, gas is cheap. That’s precisely the time when you should be thinking more seriously about buying a fuel-efficient car.
We don’t know what is going to happen to the price of gasoline or to the price of oil. Nobody knew in the beginning of 2011 that gas prices would approach $4 per gallon that year. And a year ago, when gas was at about $3.60 nationwide, nobody knew for certain that it would fall to about $2.30 this fall. If we have so much difficulty predicting prices in the next 12 months, just imagine how clueless we are about the path of fuel prices over the next 10 years.
And when you purchase a car with mileage in mind, you’re not just making a bet on gas prices for the next year, you’re making a bet on prices for the next decade. Fine, so cars may break down. And many people do lease cars for only a few years. But these are highly durable goods. According to the U.S. Department of Transportation the average age of a passenger car in the U.S. in 2014 was 11.4 years. This figure has been steadily rising over the past two decades; in 1995, the average passenger car in the U.S. was just 8.4 years old. Roll this trend forward, and it is highly likely the car you buy today will be on the road in 2026. And if you’re not driving it, somebody else will be.
In the next 10 years, gasoline may get even cheaper—rising efficiency could keep a lid on demand, and cars driven by electricity and natural gas could become viable alternatives. Or gas could become more expensive—thanks to new gasoline and carbon taxes, booming demand in emerging markets, and conflict in oil-producing countries. Oh, hey, the House of Representatives just voted to lift the 40-year-old ban on exporting oil. In time, that might place upward pressure on gas prices.
We just don’t know. But it’s highly likely that for some period of the next several years—maybe most!—gas will cost significantly more than it does today. And that means many buyers who are influenced by today’s low prices are locking themselves into potentially damaging financial arrangements. If gas prices stay the same or fall marginally, you won’t notice much. If they spike, or simply rise, it’ll eat into disposable income. Drive 15,000 miles a year in a car that gets 20 mpg, and you’ll use 750 gallons of gas a year. At $2 per gallon, the annual fuel bill is $1,500; at $4 per gallon, it doubles to $3,000. For the median American family, which had 2014 income of $53,657, that $1,500 difference is 2.8 percent of all the money they have to spend in a year. (Yes, I know, you can always sell the gas guzzler if prices rise and stay elevated. But the value you get from reselling will be heavily influenced in part by the price of gas. The value of used Jeeps will hold up really well if gas stays at $2 per gallon; at $5 gallon, not so much.)
It may sound counterintuitive, but just as umbrellas are always cheaper on sunny days, a sustained period of low gas prices is actually a good time to buy a more fuel-efficient car than you would otherwise. Because of the broader dynamics in the market, buyers are much more likely to get attractive discounts and incentives on fuel-efficient cars today. In addition to the package of options—satellite radio, electric windows, butt warmers—a buyer gets another component for free: insurance against higher oil prices. This thinking works in the other direction, too. It’s a very hard psychological lift to suggest to consumers looking at new cars today to think about how to protect themselves from high gas prices 10 years from now. So if you must buy a gas guzzler, you may want to invest a couple thousand bucks in long-dated futures contracts on oil, too. Then, if oil prices spike, the pain at the pump will be assuaged by your capital gains.