As gas prices rapidly approach four bucks a gallon, Americans are feeling pain at the pump. So are the automobile manufacturers and dealers. Rising gas prices and their negative impact on the economy are causing consumers to put off vehicle purchases or to trade in their gas guzzlers for smaller, more fuel efficient cars. As a result, automakers and dealers are experiencing a significant decrease in sales and profits. Although small car sales rose over 7% the first four months of this year, SUV sales have dropped 28%, minivan sales fell 20% and pickup truck sales dropped nearly 18%.
This trend is especially hard on the American auto manufacturers whose profits depend heavily on sales of large trucks and SUVs. Although the “Detroit Three” (GM, Ford and Chrysler) now offer dozens of smaller cars that get around 30 miles per gallon (with much improved quality), they still build far more trucks and SUVs than their Asian competitors. While Detroit can shift its production to the more fuel-efficient vehicles to some extent, it can’t just turn on a dime. The development cycle for new cars (from research to design to production) can run anywhere from three to ten years, severely hampering an automaker’s ability to adjust to sudden market changes.
Since the auto manufacturers can’t magically replace their inventory with more fuel-efficient vehicles, they have to develop more creative ways to market the vehicles they already have. The traditional solution is to offer large cash rebates and zero-percent financing to make slow selling vehicles more attractive to consumers. This year, that hasn’t been enough. So, some automakers have created a new type of incentive – discounted gas! This program is very clever, as it speaks to consumers’ greatest area of pain. But, is it really a good deal?
To answer that question, we have to read the fine print, make some comparisons, and actually do the math. (Yuck!) Most programs limit the amount of gas that can be purchased at the discounted price to cover fuel for 12,000 miles per year for three years. Most Americans drive closer to 15,000 miles per year, so the discount will not last the entire year. The discounted gas program uses the combined city/highway fuel economy estimates for each vehicle to calculate how many gallons of gas add up to 12,000 miles. For example, an SUV with a combined rating of 15 mpg will give you an allotment of 800 gallons of gas per year. At the discounted price of $2.99, that comes to $2,392 per year. If gas prices stabilize at $4.00 per gallon (which some economists say is likely – yeah, right), you would save $808 per year or $2,424 over three years.
That sounds like a pretty good deal. However, we must consider that the vehicles offering the special gas program tend to have lower fuel economy ratings than their competitors (which is why they aren’t selling in the first place). Going back to our example above, if you instead purchase an SUV that gets 22 mpg, you would only need 545 gallons of gas to get you 12,000 miles. At $4.00 per gallon, you would spend $2,180 – that’s $212 less per year (or $636 over three years) than what you would have spent with the discounted gas program. If gas prices soar to over $4.50 per gallon, then it’s probably a push. Of course, if you keep the gas program vehicle for more than three years, you will go back to paying the same high price for gas as everyone else, while driving a less fuel efficient vehicle. Any amount of money you saved under the discounted gas program will be quickly lost.
Furthermore, the gas deals typically reduce the amount of the cash-back incentives you can apply to the purchase of the vehicle. Sometimes the gas savings makes up for the difference in the incentives, but sometimes it doesn’t—particularly for vehicles with large cash incentives.
Unfortunately, there is no magical solution to the gas price predicament. If you have your heart set on one of the vehicles offering a discounted gas deal, and the gas savings is greater than the cash incentives, then take advantage of it. However, if your goal is simply to save money at the pump, then you are better off purchasing a more fuel efficient vehicle. Or maybe a bicycle.