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MyGallons.com: Profiteering off the frenzied fear of the weekly fillup July 4, 2008

Posted by The Armchair Economist in Commentary.
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8 comments

Recently, I’ve been reading countless stories about consumers making ridiculous financial decisions to trade their SUVs for something more fuel efficient, anything ranging from a Smart car to a motorcycle.  The sad part is that for many of these people, they are upside down on their SUV (ie: they owe more on the SUV than the car is worth) so they are paying HIGHLY inflated prices for the gas sipper they are trading into (I’ve heard loans of 39k for a 27k Prius!)  Insane, but this isn’t normally enough to get me to post, but today I came across an article by Kimberly Palmer, of the Alpha Consumer blog on a company called MyGallons.com.

The premise of this company is that you can buy gas at today’s price and use it later, when gas prices increase even more.  Sounds good right?  (if you have any kind of training in finance you probably already see the faults).  The fine print includes: Annual Fee of: $29.95, ($39.95 if you don’t want to give them permission to automatically deduct from your credit card), a $1.95 ‘fill up’ fee if you use a credit card (the only accepted payment method), in addition to other fees (ie: an overdraft fee).  I’ll leave it to you to do some back of the envelope math to see how much ‘savings’ you need to negate the transaction costs.

So what happens if the price of gas goes DOWN?  The FAQ helpfully states: Gas prices move up and down all the time. If prices drop you can wait for them to go back up in the days or weeks ahead. (more…)

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Economics of trading in an SUV May 29, 2008

Posted by The Armchair Economist in Commentary.
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5 comments

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..