Oilfield Math

[mugaliens]

I received this from my father on Monday. Apparently, the figures are reasonably accurate (if they're not, please refute with source and corrected bottom line. I spotted one fallacy in it, which I'll mention in a moment:


A clunker that travels 12,000 miles a year at 15 mpg uses 800 gallons of gas a year.

A vehicle that travels 12,000 miles a year at 25 mpg uses 480 gallons a year.

So, the average Cash for Clunkers transaction will reduce US gasoline consumption by 320 gallons per year.

They claim 700,000 vehicles so that's 224 million gallons saved per year.

That equates to a bit over 5 million barrels of oil.

5 million barrels is about 5 hours worth of US consumption.

More importantly, 5 million barrels of oil at $70 per barrel costs about $350 million dollars

So, the government paid $3 billion of our tax dollars to save $350 million.

We spent $8.57 for every dollar we saved.

Here's the fallacy: The figures are on a per-year basis, and cars last longer than one year.

However, some truth remains, as on average, cars don't last 8.57 years. I think it's more like 3 to 5 years, isn't it?

[Swift]

However, some truth remains, as on average, cars don't last 8.57 years. I think it's more like 3 to 5 years, isn't it?
I have no clue. I keep mine more in the 7 to 10 year range.

The other part of this economics equation was the idea to help the auto industry and the economy by boosting new car sales. From the economics reports I've read, there was such a boost, but I couldn't tell you how it figured in the cost/benefit analysis either.

[Atraveller]

I have no clue. I keep mine more in the 7 to 10 year range.

The other part of this economics equation was the idea to help the auto industry and the economy by boosting new car sales. From the economics reports I've read, there was such a boost, but I couldn't tell you how it figured in the cost/benefit analysis either.

Back to Keynesian ecconomics - every productive dollar put into the ecconomy is leveraged - therefore has a multiple effect - the auto industries (which are several tiers deep when you consider the auto dealers, auto transport companies, auto manufacturers, auto parts suppliers, etc...) and the employees at each level will be spending money in multiple directions (food, housing, etc...) so it has a real compounding effect...

Then again some economists thing Keynes got it all wrong.

:lol:

The real waste is putting money into proping up defunct banks that are too big to fail. That is non-productive money - and not only has no leveraging effect, but is non productive all the while it is out of circulation. (but that is well discussed in the Black Monday thread)

[kleindoofy]

7-8 years car life is much more realistic, probably more including used-car life span.

However, gas consumption is only a part of the equation and can be very misleading.

Approx. 30% (or more) of the total energy consumption of a car in its life span is expended in the manufacturing of the car, including metal, rubber, glass, etc. production.

The shorter the car runs, the less important mileage becomes.

If this were only about total energy consumption, in many cases it would be better to keep guzzlers on the road longer than to replace them prematurely with newer, more fuel efficient cars.

But it's not only about total energy consumption, at which I refer to post #4.

[novaderrik]

7-8 years car life is much more realistic, probably more including used-car life span.

However, gas consumption is only a part of the equation and can be very misleading.

Approx. 30% (or more) of the total energy consumption of a car in its life span is expended in the manufacturing of the car, including metal, rubber, glass, etc. production.

The shorter the car runs, the less important mileage becomes.

If this were only about total energy consumption, in many cases it would be better to keep guzzlers on the road longer than to replace them prematurely with newer, more fuel efficient cars.

But it's not only about total energy consumption, at which I refer to post #4.

umm, you just made post #4..
and one more thing- in before the lock. politics and all..

[kleindoofy]

umm, you just made post #4. ...
Err, refer to post #3. :whistle:

[Atraveller]

umm, you just made post #4..
and one more thing- in before the lock. politics and all..

uhhmmmm - I make a distinction between economics and politics... Did I step over a line?

[Matchbook]

Here's the fallacy: The figures are on a per-year basis, and cars last longer than one year.

That's barely the beginning of what's wrong here.


I have no clue. I keep mine more in the 7 to 10 year range.

For purposes of figuring out fuel savings, the relevant lifespan is not that of a new car, but the remaining life of the clunker that was replaced. Some of the people who bought new cars under the program would have bought them anyway. For those people, the government spent infinitely many dollars for each dollar in fuel consumption saved, since there were no savings - these people did exactly what they were going to do anyway. Maybe some others would have kept the clunker one more year, still others would have kept it two years, or maybe five years. Who knows. But that's what determines the fuel savings - how much life was left in the clunker, not the lifespan of the new car. If we really want to get picky, the people who bought new cars sooner than they would have otherwise, will probably replace the new cars they're buying now a few years earlier as well. Maybe five or eight years from now, when they're replacing the new cars they just bought, there will be some additional fuel savings.

But what precisely does the amount of the subsidy divided by the fuel savings mean? You can divide any number by any other number (except zero), but the result is not necessarily meaningful. If you want to make the program sound even more wasteful, count the total cost of the new cars bought, not just the government's share. If the $3 billion total cost of the program and the 700,000 vehicles number are accurate, that means the subsidy was $4,286 per vehicle. Not many new cars in the US sell for that price. Let's say that the average price of the new car bought was $15,000. If a reduction of fuel costs of $500 per year were the only reason to buy a new car, then we wouldn't expect anyone to buy a $15,000 new car unless the savings were to last 30 years (gross oversimplication - we would need to take time value of money into account as well, which makes it even worse). Why does anyone ever buy a new car then? For one, the new car probably has years of life left at the time that the clunker would have breathed its last gap.

So, by spending $4,285 of the government's money and a great deal more of their own money, the new car purchasers have saved $500 per year, probably for a small number of years. So what? In addition to the fuel savings, they have had the satisfaction of driving the new car for a few years instead of the clunker, and, at the time the clunker would have expired, they still have a good car with years of useful life remaining. Taking only the government's share of the cost of the new car (ignoring the purchaser's cost) and dividing only by the fuel savings (ignoring the other benefits of the new car) is about as meaningless as it gets.

Furthermore, as others have pointed out, the goal of the program was not to reduce fuel consumption. It was to increase consumer spending and bail out the auto industry.

[publius]

Edmunds did an analysis of the cash for clunkers program, press release here from last October:

http://www.edmunds.com/help/about/press/159446/article.html

What happened was most of the sales were "pull foward demand". That is, the program simply pulled foward sales that were already going to happen, causing sales in the "on months" to skyrocket, but crater after the program was over. The numbers since then have borne out this analysis.

When you divided the remaining sales that wouldn't have happened without the program, it came out to a cost to Uncle of about $24K per clunker.


-Richard

[HenrikOlsen]

As the actual total energy saving is in the saved runtime of the old cars that were replaced earlier than they would have been without the subsidy, the whole point of the exercise is to "pull foward demand", to get the clunkers scrapped earlier.

[peteshimmon]

Did anyone notice if list prices of new
vehicles crept up a bit when the scheme came
in?

Of the benefits I suspect there are numerous
factors we dont know about. How about the
blip in new scrap metal. There are may
wind turbine towers to be built at the
moment. The cost benefit analysis spreadsheet
may have dozens of components.

Or the input/output table if these are still
in vogue.

[Swift]

uhhmmmm - I make a distinction between economics and politics... Did I step over a line?
No you did not, nor has anyone else. As long as we keep this on economics and car technology, and keep politics and policy out of it, we're fine.

[Swift]

By the way, welcome to BAUT Matchbook.

[NorthernBoy]

The real waste is putting money into proping up defunct banks that are too big to fail. That is non-productive money - and not only has no leveraging effect, but is non productive all the while it is out of circulation. (but that is well discussed in the Black Monday thread)

Of course it isn't non-productive, that's a ludicrous assertion.

The money is most definitely not out of circulation, as the banks have not simply put it in a box in a vault, it's all being used.

I do despair at how people can get so annoyed, while also being so profoundly ignorant of what the banks do.

The bailout was not to help us bankers, we were going to be absolutely fine whatever happened, it was to help normal taxpayers like you (assuming you are paying tax), who would have been in all sorts of trouble if the banks collapsed.

[Ara Pacis]

Here's the fallacy: The figures are on a per-year basis, and cars last longer than one year.

However, some truth remains, as on average, cars don't last 8.57 years. I think it's more like 3 to 5 years, isn't it?

Are you referring to lifetime of the car or ownership duration of the car? My car is almost 19 years old and I've had it for almost 11 years, used. Not only will the new, ostensibly more efficient cars give a life to the buyer, they may give an extended life as a used car.

Also, I didn't pay much attention to the details of the law, but could someone purchase a clunker and then trade it in to get a discount bigger than the cost of the clunker? I'm not sure if that would adjust the equation, but it might, depending on how the clunker might have been used, or unused, prior to post-trade demolition.

[tashirosgt]

I wonder how many of the "clunkers" were cars that lacked air bags? Perhaps there are some health care related savings if their replacements did have air bags.

[Bean Counter]

That equates to a bit over 5 million barrels of oil.


Actually, a barrel of oil only produces about 18.5 gallons of auto fuel.
Cite:
http://tonto.eia.doe.gov/energyexplained/index.cfm?page=oil_home#tab1

Therefore the savings is around 12.1 million barrels of oil a year.

Uncle Sam is not buying the oil, though, the refineries are so I do not understand that line of analysis.

It does mean that the refineries will be selling less gas. At an average state and federal gas sales tax of around $0.20, this means they are shooting themselves in the foot to the tune of $40 million or so a year in lost fuel taxes.

[Larry Jacks]

There were a host of problems with the Cash for Clunkers program. For one thing, it removed about 700,000 serviceable vehicles from the road. Those vehicles fit the needs of many lower income people who couldn't afford a new car even with the subsidy. One predictable effect of removing that many cars from the market was that it likely caused the price of serviceable used cars to go up. It also cut the business of mechanics and parts stores that maintained the vehicles. At significant expense and using borrowed money, it did cause an increase in car sales but the biggest beneficiaries were Japanese and Korean auto makers based on which cars were actually purchased. A significant percentage of those car buyers were going to buy a car anyway, so all it did was accelerate their purchases, not stimulate new ones. Once the subsidy went away, car sales slumped. When factoring in the cost of the program, don't forget the cost of servicing the debt on the borrowed money used to pay for it.

[peteshimmon]

Think we need the opinion of that freakonomics
guy!