## The High Cost of Gas Part II

*By Chris Wood, CPA* - It is time to update my post from last April 23, “The High Cost of Gas”. In that post, I calculated the daily cost to travel 100 miles for my Nissan Sentra which gets 34 miles to the gallon. I got the cost right ($10.29), but I transposed some figures on the calculation I had shown:

- Assume 100 miles and $3.50 per gallon (MPG/100*3.5)

The actual formula is:

- (100/MPG*3.5)

How embarrassing. Well, nobody called me on it so maybe not so bad. But this does help illustrate the abstract concept of miles per gallon. Researchers at the Fuqua School of Business at Duke University determined that “Posting a vehicle’s fuel efficiency in “gallons per mile” rather than “miles per gallon” would help consumers make better decisions about car purchases and environmental impact”.

To illustrate go here to take the MPG illusion test:

http://www.fuqua.duke.edu/news/mpg/mpg.html

Here is a table that compares MPG to Gallons used per 100 miles.

MPG | Gallons Used |

10 | 10.00 |

20 | 5.00 |

25 | 4.00 |

30 | 3.33 |

35 | 2.86 |

40 | 2.50 |

45 | 2.22 |

50 | 2.00 |

The difference of going from 10 MPG to 20 MPG, an improvement of 10 MPG, is 5 gallons per hundred miles, but the difference of going from 20 MPG to 50 MPG, an improvement of 30 MPG is only 3 gallons per hundred miles. Thus, the consumer confusion. Here is a calculation of the savings from the quiz illustration using the current US average for regular unleaded gasoline. I used 26,000 for annual miles driven. Come on, we are talking about a 100 mile commute per day.

So the savings of switching from a vehicle that gets 10 MPG to a vehicle that gets 20 MPG vs. switching from a vehicle that gets 20 MPG to a vehicle that gets 50 MPG is an astounding $2,1K. Now consider the trend. Here is a download that shows some current European petrol prices from Weekly Retail PrPemium Motor Gasoline Prices (Including Taxes)

The European average for the week of July 7, 2008 is 9.36 per gallon. The last time the European average was under $4 was December 2002. What happens if we drop in their average?

The price of gas more than doubled (4.00 to 9.36), but the savings went up almost 6 fold ($2,108 TO $12,168). The fuel cost for driving 26,000 miles in a Hummer in Belgium is about $24,000. That’s just about the cost of a Prius.