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Economics of trading in an SUV May 29, 2008

Posted by The Armchair Economist in Commentary.
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With oil futures at $130/barrel and gas prices topping $4.00 a gallon in many areas, SUV owners are feeling the pinch at the pump where fill ups often cost between $80-100. While it is easy to villify SUV owners for their largess and lack of forsight, the question remains: Is it worth it to trade the SUV in for a smaller, more efficient car?

Many consumer finance organizations (1,2) argue that it isn’t economic to trade in an SUV while the SUV market is depressed and trade in values are low. The argument is that since everyone else is trading in their SUVs and no one is looking to buy them, the market is flooded with these vehicles. The trade in value you will get is thousands of dollars less than what these vehicles ought to be worth, and the hit you will be taking on trade-in value is not justified from the savings recouped by $30 per fillup. You would need hundreds of fillups to make the trade-in worthwhile and the smarter strategy is just to wait until the market improves before trading in your SUV.

This argument is predicated on two facts: 1) Gas prices will improve.. or atleast not continue to get worse 2) Demand of SUVs will improve in the future. Without a crystal ball, there is no guarantee that gas prices will improve (infact, Ford predicts gas prices will remain in the 3.75-4.25 range through 2009). While I don’t know if gas prices will be 3.00 or 5.00 one year from now, I’m willing to bet that it won’t go to the price levels in the 90s-early 2000s ($1-2/gallon) that enabled consumers to waste gas without a second thought. (To put that into some perspective, oil prices need to drop from the current $130/barrel level down to the $30-50/barrel level!) Without a significant drop in oil prices, we will likely not see any increased demand for gas guzzling vehicles. The only way we’d work through the current backlog of SUVs is for people who actually NEED the carrying capacity of these vehicles…

A RATIONAL decision to purchase an SUV? Thats a new one..

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Comments»

1. Tony - June 2, 2008

SUV owners were completely irresponsible when they purchased their vehicles in the last couple of years. Even if they were too dense to see that gas prices were only going in one direction, they should have realized the damaging effect that their trucks have on the environment. Most SUVs I see on the roads have only one occupant. It’s wasteful of our planet’s resources to drive just one person in a truck. I’ve no sympathy for these idiots.

2. Dee - June 15, 2008

You have to walk a mile in my shoes before you can judge me as an idiot for driving a large SUV. We are a family that NEEDS that carrying capacity to carpool children to and from school and to their various activities. We cannot afford a small gas efficient vehicle for just me to ride in while my children are at school or activities. Yes, I do have to drive my Suburban with only me in the car sometimes and occasionally from the rural town where I live into to the city. However, when I get back home, I am carpooling any number of children around town. It isn’t an alternative for us because of lack of drivers, but I am curious, is it more efficient to carry 7-8 people and their gear in one large vehicle than to have to use 2 sedans? I am envious of those with great gas mileage and it is painful to our budget to pay over $100 to fill up at the pump. But right now, it is what we have to do. One day we can downsize, but for now reserve your harsh judgement until you know the circumstances of that SUV owner.

3. The Armchair Economist - June 15, 2008

Dee, I hope you didn’t take my post as a personal attack on SUV drivers.. I don’t think I implied that in any case.. I merely presented a economic analysis on whether it was wise to trade in a SUV at this time.

While most of the people who own SUVs don’t exactly NEED it, I respect the vehicle for its practicality. Trucks and SUVs have their places.. as in hauling gear/people etc. But I question the need for the ‘bigger is better’ mentality that seemed to have permeated our car culture. Also, how many times have I seen one person drive their hummer on the LIE? A large part of the reason why we have >4.00 gas is our wasteful tendencies..

It seems like you can make use of the utility of an SUV and have put thought into why you really need one, good for you. (and you obviously don’t need to trade it in.. so why are you even reading this post 🙂 )

4. Clark - June 18, 2008

Wired magazine had a very interesting sidebar on a similar aspect of this topic – namely, that if you are concerned about the environment, it is better to buy nearly ANY used car as opposed to buying a new Prius, because the carbon offset is already paid for on a used car. In other words, the energy used to make a new car (especially a hybrid with nickle batteries) is NEW energy that could be used for other purposes, when there are countless used cars on the roads (and in the front lawns of rural communities) which represent “already used energy”.

I know this isn’t the same thing you are talking about, except for the core concept: namely, that just because your SUV is getting 15 MPG does not mean that its economical to run out and buy a new car.

Sadly, I feel that we are all consumers at heart and the vast majority of us enjoy having a new thing, especially a new car.

I think if more people engaged in hypermiling – even just driving in an efficient way they don’t enjoy – then they wouldn’t need to turn in their SUV so badly. Personally, I drive a horrible SUV, and I’ve taken it from 17 MPG to 20MPG, and hoping for 25MPG in the future.

I think its a much better solution than running into a dealership and running out and buying a new car.

5. Alan CB - August 17, 2008

we drive a very old Ford Explorer.It’s very comfortable and useful. it gets between17 and 19 mpg and we drive 7000 miles a year. it uses 400 gallons of gasoline per year which costs about 1600$. if we bought a car which got 40 mpg, we would only use 175 gallons and would save $900.Of course,there would be a smaller amount of pollution but this would be offset by the carbon footprint of the manufacture of the new car, so it makes sense to run the SUV until it falls apart and then buy a used high mileage compact car like a Honda civic.


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