June 4, 2008
Economic Scene
Economic Scene
Big Vehicles Stagger Under the Weight of $4 Gas
A fully loaded Ford F-250 pickup truck is a whole lot of vehicle. It can tow a horse trailer with multiple horses. It comes with a DVD-based navigation system for the driver as well as a DVD player for passengers who are sitting in the extended cab.
And how much does an F-250 set you back these days?
Try $100,000.
The F-250 is part of the first generation of mass-market vehicles — along with the Lincoln Navigator, Lexus LX 570 and a few others — to approach the six-figure mark. Now, if you walked into a showroom today and asked to see one of these trucks, the price tag wouldn’t be anywhere near $100,000. It would be much closer to $50,000.
But you don’t buy a vehicle to leave it in your garage. You buy it to drive it. So it makes sense to consider the full costs of ownership, which include insurance, interest, repairs, taxes and, of course, gasoline. If gas remains near $4 a gallon, as many analysts expect, a big vehicle like the F-250 will cost $100,000 for an owner who keeps it for a typical amount of time (five years) and drives it a typical amount (15,000 miles a year). The gas alone would cost about $30,000, up from about $10,000 in the 1990s.
No wonder, then, that Americans are changing their driving habits so quickly. With sales plummeting, General Motors said Tuesday that it would stop making pickup trucks and sport utility vehicles at four of its North American plants.
The company is also considering selling its Hummer brand, an emblem of the megavehicle. Rick Wagoner, G.M.’s chairman, explained the moves by saying that he thought the shift toward more efficient cars was “by and large, permanent.”
The unyielding reality is that price matters, enormously. That’s all you need to know about the car market these days. And it’s almost all you need to know about the debate over energy policy that has consumed the Senate this week.
•
Americans fell in love with vehicles like the Ford pickup trucks in the 1990s, back when gas didn’t cost much more than $1 a gallon. That seemed normal at the time, because gas prices had remained in a narrow range — roughly 90 cents to $1.25 a gallon — going back to the early 1980s.
But this stability was actually a sign of something deeply unusual. The cost of most everything else was rising, as was the size of people’s nominal paychecks. So in practical terms, gas was becoming cheaper. By 1999, it had effectively fallen to its lowest point on record, about 30 percent lower than in the 1950s and ’60s.
Cheap gas made a highly desirable luxury item — hulking vehicles, with lots of power, a high view of the road and backseat DVD players — affordable for many families. The recent run-up in gas prices has changed that. On Tuesday, the nationwide average hit another record, $3.98 a gallon.
With help from Jake Fisher, a senior automotive engineer at the Consumer Reports test track in Connecticut, I crunched some numbers this week to see how much more expensive these big vehicles had become. The answer is pretty simple: a lot more expensive.
While the F-250 costs $100,000 and a fully loaded F-150 — the better-known, smaller Ford pickup — costs about $70,000, a Ford Focus still costs less than $40,000 over five years. A Honda Civic Hybrid does, too. A Toyota Prius costs only a little more. A Subaru Outback station wagon runs $50,000 or so.
To put this in perspective, the difference between a Focus and an F-250 over five years is $60,000. The annual pretax income of a typical family in this country is also about $60,000. So choosing a F-250 over a Focus is like volunteering for a 20 percent pay cut. The relative resale values might cushion the blow a little, but not much.
That’s why more people are deciding that towing capacity and the other benefits of pickup trucks and S.U.V.’s are not worth the costs. The F-250 may still make sense for some business owners. But, as Mr. Fisher says, on those few occasions when the rest of us need to move some horses, we can rent a truck. “The new economics of car buying is, ‘Don’t overbuy,’ ” he told me. “Buy something you’re going to need most of the time.”
If gasoline were like most other products, the story could end here. There would be little reason for United States senators to worry about the ebbs and flows of people’s driving habits. But gasoline — and, more broadly, oil — is different, for two main reasons.
One, oil is a scarce resource that is disproportionately controlled by unfriendly foreign governments. Two, the use of oil produces carbon dioxide, which is heating up the planet and could eventually cause all sorts of problems. The planet’s 10 warmest years on record have all occurred since 1995. It seems pretty clear that we’d be better off if we could figure out how to use less oil.
So the Senate is spending this week debating a bipartisan-sponsored bill that would cap carbon use in coming years. The government would then issue permits for carbon use that could be traded among companies. The net result of this cap-and-trade system would be to increase the cost of energy use.
The bill has real flaws — it’s needlessly complex, with too much potential for legislative pork — and is not likely to pass this year. Even if it did, President Bush has signaled that he would veto it. But the fact that it has finally reached the Senate floor seems to represent the beginning of a serious national debate about energy use.
And there is one overriding principle that should inform that debate: price matters. The only reliable way to cut oil use — to reduce the flow of money to Iran, Russia and Saudi Arabia, to reduce the odds that the planet just keeps getting hotter — is to make oil more expensive.
This, of course, is precisely the specter that has been raised by opponents of new carbon rules. Gas costs way too much already! Yet that argument gets cause and effect almost perfectly backward.
Oil has become so expensive mainly because the world is using so much of it. Yes, making it more expensive — about 40 cents a gallon more expensive by 2030, according to two analyses of the current bill — will bring some medium-term economic pain. But the pain can be greatly reduced through broad-based tax cuts, financed with the revenue raised by a good cap-and-trade system (or, as many economists prefer, a carbon tax).
More important, raising the cost of energy could bring enormous long-term benefits. It could make the country more secure, strategically and economically.
“The real concern,” said Nathaniel Keohane, the head of economic policy and analysis at the Environmental Defense Fund, “should be our vulnerability to $7-a-gallon gasoline that is a function of global demand and stagnant supply.” Goldman Sachs recently suggested that $7-a-gallon gas was conceivable.
As unpleasant as it’s been, the run-up in gas prices has brought one big advantage. It has shown how flexible American consumers are — how well they can adapt to new prices without turning their lives upside down.
For more than two decades, Ford’s F-series pickup trucks have been the most popular line of vehicles in the country, selling more every year than any sedan, station wagon or S.U.V., foreign or domestic. But F-series sales have dropped more than 30 percent since last spring.
Last month, according to the new sales numbers released on Tuesday, the Toyota Corolla and Camry and the Honda Civic and Accord all surged past the F-series. It was the first month since December 1992 that a car — not a truck — was the country’s top-selling vehicle. The world doesn’t seem to have come to an end as a result.
E-mail: leonhardt@nytimes.com
And how much does an F-250 set you back these days?
Try $100,000.
The F-250 is part of the first generation of mass-market vehicles — along with the Lincoln Navigator, Lexus LX 570 and a few others — to approach the six-figure mark. Now, if you walked into a showroom today and asked to see one of these trucks, the price tag wouldn’t be anywhere near $100,000. It would be much closer to $50,000.
But you don’t buy a vehicle to leave it in your garage. You buy it to drive it. So it makes sense to consider the full costs of ownership, which include insurance, interest, repairs, taxes and, of course, gasoline. If gas remains near $4 a gallon, as many analysts expect, a big vehicle like the F-250 will cost $100,000 for an owner who keeps it for a typical amount of time (five years) and drives it a typical amount (15,000 miles a year). The gas alone would cost about $30,000, up from about $10,000 in the 1990s.
No wonder, then, that Americans are changing their driving habits so quickly. With sales plummeting, General Motors said Tuesday that it would stop making pickup trucks and sport utility vehicles at four of its North American plants.
The company is also considering selling its Hummer brand, an emblem of the megavehicle. Rick Wagoner, G.M.’s chairman, explained the moves by saying that he thought the shift toward more efficient cars was “by and large, permanent.”
The unyielding reality is that price matters, enormously. That’s all you need to know about the car market these days. And it’s almost all you need to know about the debate over energy policy that has consumed the Senate this week.
•
Americans fell in love with vehicles like the Ford pickup trucks in the 1990s, back when gas didn’t cost much more than $1 a gallon. That seemed normal at the time, because gas prices had remained in a narrow range — roughly 90 cents to $1.25 a gallon — going back to the early 1980s.
But this stability was actually a sign of something deeply unusual. The cost of most everything else was rising, as was the size of people’s nominal paychecks. So in practical terms, gas was becoming cheaper. By 1999, it had effectively fallen to its lowest point on record, about 30 percent lower than in the 1950s and ’60s.
Cheap gas made a highly desirable luxury item — hulking vehicles, with lots of power, a high view of the road and backseat DVD players — affordable for many families. The recent run-up in gas prices has changed that. On Tuesday, the nationwide average hit another record, $3.98 a gallon.
With help from Jake Fisher, a senior automotive engineer at the Consumer Reports test track in Connecticut, I crunched some numbers this week to see how much more expensive these big vehicles had become. The answer is pretty simple: a lot more expensive.
While the F-250 costs $100,000 and a fully loaded F-150 — the better-known, smaller Ford pickup — costs about $70,000, a Ford Focus still costs less than $40,000 over five years. A Honda Civic Hybrid does, too. A Toyota Prius costs only a little more. A Subaru Outback station wagon runs $50,000 or so.
To put this in perspective, the difference between a Focus and an F-250 over five years is $60,000. The annual pretax income of a typical family in this country is also about $60,000. So choosing a F-250 over a Focus is like volunteering for a 20 percent pay cut. The relative resale values might cushion the blow a little, but not much.
That’s why more people are deciding that towing capacity and the other benefits of pickup trucks and S.U.V.’s are not worth the costs. The F-250 may still make sense for some business owners. But, as Mr. Fisher says, on those few occasions when the rest of us need to move some horses, we can rent a truck. “The new economics of car buying is, ‘Don’t overbuy,’ ” he told me. “Buy something you’re going to need most of the time.”
If gasoline were like most other products, the story could end here. There would be little reason for United States senators to worry about the ebbs and flows of people’s driving habits. But gasoline — and, more broadly, oil — is different, for two main reasons.
One, oil is a scarce resource that is disproportionately controlled by unfriendly foreign governments. Two, the use of oil produces carbon dioxide, which is heating up the planet and could eventually cause all sorts of problems. The planet’s 10 warmest years on record have all occurred since 1995. It seems pretty clear that we’d be better off if we could figure out how to use less oil.
So the Senate is spending this week debating a bipartisan-sponsored bill that would cap carbon use in coming years. The government would then issue permits for carbon use that could be traded among companies. The net result of this cap-and-trade system would be to increase the cost of energy use.
The bill has real flaws — it’s needlessly complex, with too much potential for legislative pork — and is not likely to pass this year. Even if it did, President Bush has signaled that he would veto it. But the fact that it has finally reached the Senate floor seems to represent the beginning of a serious national debate about energy use.
And there is one overriding principle that should inform that debate: price matters. The only reliable way to cut oil use — to reduce the flow of money to Iran, Russia and Saudi Arabia, to reduce the odds that the planet just keeps getting hotter — is to make oil more expensive.
This, of course, is precisely the specter that has been raised by opponents of new carbon rules. Gas costs way too much already! Yet that argument gets cause and effect almost perfectly backward.
Oil has become so expensive mainly because the world is using so much of it. Yes, making it more expensive — about 40 cents a gallon more expensive by 2030, according to two analyses of the current bill — will bring some medium-term economic pain. But the pain can be greatly reduced through broad-based tax cuts, financed with the revenue raised by a good cap-and-trade system (or, as many economists prefer, a carbon tax).
More important, raising the cost of energy could bring enormous long-term benefits. It could make the country more secure, strategically and economically.
“The real concern,” said Nathaniel Keohane, the head of economic policy and analysis at the Environmental Defense Fund, “should be our vulnerability to $7-a-gallon gasoline that is a function of global demand and stagnant supply.” Goldman Sachs recently suggested that $7-a-gallon gas was conceivable.
As unpleasant as it’s been, the run-up in gas prices has brought one big advantage. It has shown how flexible American consumers are — how well they can adapt to new prices without turning their lives upside down.
For more than two decades, Ford’s F-series pickup trucks have been the most popular line of vehicles in the country, selling more every year than any sedan, station wagon or S.U.V., foreign or domestic. But F-series sales have dropped more than 30 percent since last spring.
Last month, according to the new sales numbers released on Tuesday, the Toyota Corolla and Camry and the Honda Civic and Accord all surged past the F-series. It was the first month since December 1992 that a car — not a truck — was the country’s top-selling vehicle. The world doesn’t seem to have come to an end as a result.
E-mail: leonhardt@nytimes.com
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