You May Want To Think Twice Before Purchasing That Fuel Efficient Hybrid

By Markets Fool.com

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The new Chevy Bolt. Image source: William Oliver/Flickr.

After years of being trumped by vehicle size and third-row seating, fuel efficiency has ascended the list of factors considered in the car-buying experience.

A poll published by the Consumer Federation of America in 2013 found that 85% of respondents supported the recent increase in Corporate Average Fuel Economy, or CAFE, standards, which will push the average efficiency of every automaker's fleet to 54.5 miles per gallon by 2025 -- nearly double levels at the time of the announcement. Meanwhile, 88% say fuel economy will be an important factor in their next vehicle purchase, with 59% saying it will be "very important".

There is simple logic behind the support. Owning a more efficient vehicle saves you money at the pump. And if everyone had a more efficient vehicle the United States would consume less petroleum overall, emit fewer greenhouse gases, and perhaps even gain a competitive advantage by fostering research into next-generation technologies, which could be exported to global markets craving the aforementioned benefits.

But what if the value derived from rising fuel economy doesn't deliver on your expectations? Unfortunately, some simple math may prove that to be true. Before you "upgrade" to that shiny, new, fuel-efficient hybrid you may want to consider how the law of diminishing returns deflates American fuel economy gains.

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The "MPG Illusion"
Question: Over a 1,000 mile trip, a vehicle that fetches 15 mpg will save 33 gallons of gasoline compared to a vehicle that fetches 10 mpg. Knowing that, how many gallons of gasoline will a car achieving 35 mpg save compared to a vehicle achieving 30 mpg on the same 1,000 mile trip?

Answer: Five (5) gallons.

This is what the U.S. Environmental Protection Agency refers to as the "MPG Illusion", which exists because of the non-linear relationship between gallons consumed over a given distance and fuel economy. It's a simple calculation, but here's the graph the EPA uses to demonstrate the relationship.

Image source: EPA.gov

As shown directly above, the savings delivered to your wallet by efficiency gains depend on the starting point. If you're thinking about trading in your Ford Motors2005 Ford F-150 4WD (boasting a combined fuel economy rating of 14 mpg) for a 2015 Ford C-Max Hybrid (boasting a combined fuel economy rating of 40 mpg), then you can expect to see substantial savings at the pump (46 gallons per 1,000 miles driven, to be exact). But the fuel savings realized by trading in a vehicle achieving 40 mpg today for one that fetches 54.5 mpg in 2025 -- just 6.6 gallons per 1,000 miles driven -- may not justify the premium price tag you'll have to accommodate.

Consider the following table for a more detailed analysis of fuel savings you can expect by upgrading to a vehicle achieving 54.5 mpg, which is the fleet average required by 2025 (most cars will not meet this, some will exceed it, but this is for purely illustrative purposes).

Vehicle Fuel Efficiency

Gallons Consumed Per 1,000 Miles

Gallons Saved By Upgrading to 54.5 MPG

(Base Case) 54.5 mpg

18.3

---

50 mpg

20.0

1.7

45 mpg

22.2

3.9

40 mpg

25.0

6.7

35 mpg

28.6

10.2

30 mpg

33.3

15.0

25 mpg

40.0

21.7

20 mpg

50.0

31.7

15 mpg

66.7

48.3

Source: Author.

The "MPG Illusion" raises some very important questions that need to be openly discussed -- even if it challenges the assumptions made by an overwhelming majority of consumers.

Where do we decide to draw the line? Will substantial value really be created from producing cars that achieve fuel economy ratings north of 55 mpg, even on a national basis? (Granted, saving even a couple of gallons for each driver adds up for a nation that drives 3 trillion miles per year.)

The EPA has suggested that as the national automobile fleet becomes more efficient and the gains become increasingly incremental, perhaps it makes more sense to report the linear metric of fuel consumption ("gallons per 100 miles") rather than the non-linear metric of fuel economy ("miles per gallon"), which we have become accustomed to today. Can the EPA institute such a change?

What does it mean for investors?
Now, look, I'm all for efficiency, whether it relates to fuel economy, energy usage, federal programs, or my personal time. But the numbers don't lie. There may come a point when it would be difficult for automakers to justify investing large sums of capital to realize incremental gains in efficiency just because Uncle Sam said so.

That could eventually force automakers or the EPA to make pretty big changes in how fuel consumption and fuel economy are reports. Until then, it could also complicate your next car-buying experience -- or deflate the savings you think you're realizing. Consider the numbers before signing on the dotted line.

The article You May Want To Think Twice Before Purchasing That Fuel Efficient Hybrid originally appeared on Fool.com.

Maxx Chatsko has no position in any stocks mentioned. Check out hispersonal portfolio,CAPS page,previous writingfor The Motley Fool, and follow him on Twitter to keep up with developments in the synthetic biology field.The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.