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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..

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