Don't Let Gas Prices Drive Your Car-Buying Choices

Fuel prices and car-buying decisions seem to be closely linked in the U.S. Certainly as gasoline prices plummeted in the last half of 2014, sales of large pickup trucks and SUVs picked up considerably after being on the downslide for most of the decade.

Edmunds.com sales data shows that pickup truck sales in the five months after fuel prices peaked in June 2014 were up an average of 8 percent from the average sales for the seven months before that peak. At the same time, sales of small cars were down an average of 1.5 percent.

Despite some steep dips and a few tall peaks, gas prices have been trending upward since early 1999. Except for the last few months of 2014, they have ranged between $3 and $4 a gallon since the end of 2010.

There's now a projection from the U.S. Energy Information Administration that the average price of a gallon of regular will remain below $3 (national average) at least through 2016. And then stay flat until about 2020. After that the agency predicts a slow but steady increase through 2040.

But there are so many intangibles affecting oil supplies and prices that there's no fail-safe way to guess where gasoline prices are headed or how quickly or sharply they will rise, or fall, in the future; a reality the agency's deputy director Howard Gruenspecht acknowledges.

And so consumers who watched gas prices plummet recently and ditched buying a fuel-efficient car in favor of a thirstier cargo-hauler could be in for a shock if fuel prices were the main reason for that purchase. Today's pickup could turn into tomorrow's letdown, at least at the pump.

On the other hand, if your family budget can handle both the present price and any future increases in the retail cost of gasoline, then by all means get the truck, SUV or performance car you've been longing for.

The best rule of thumb is that the longer you intend to keep a vehicle, the less you should rely on the present price of fuel when determining whether your budget can handle the monthly operating costs.

It's a Random Walk

Decades of market research show that people have short-term memories when it comes to figuring how fuel prices will affect the overall cost of owning a vehicle. Few think farther ahead than three years and most don't include the cost of gas in their purchase calculations at all.

So for most of us, the long-term cost of fuel appears to be whatever the price of gas is on the day we walk into the dealership, says economist and transportation researcher Virginia McConnell, a University of Maryland professor and senior fellow at Resources for the Future, a nonprofit environment and energy research center.

That's because gas prices are so volatile that typical consumers have nothing to which they can anchor themselves. Guessing where prices will go in the future is pretty much just that, guessing.

Academics call it the "random walk" theory, meaning that when walkers have no destination in mind, it is pretty much impossible to predict with accuracy where they will wind up.

Let Your Budget Be Your Guide

While ignoring the impact of fuel prices works most of the time, it's not a good practice when fuel prices take a dramatic plunge or soar to the clouds, says Thomas Turrentine, head of the Plug-in Hybrid and Electric Vehicle Research Center at the UC Davis Institute of Transportation Studies.

That's because those wide swings never last long. Where they will end up may be unpredictable, but market forces do ensure that gas prices will climb back up once they've fallen, just as they likely will come down a bit after they fly really high.

The best rule of thumb is to ignore temporary swings, look at the annual average price of gas for the past few years and figure your car-buying budget based on that. "It is best to stick with the longer view," Turrentine says.

Ray Funk, sales manager of Humble Hyundai near Houston, says that in his car-selling career he's seen the cycle happen time and again. "People have short memories and every time gasoline prices dump, I have customers coming in and saying 'Now I can afford a bigger car,'" he says.

"Then, a year later, when gas prices have gone back up and they have to fork over that extra cash at the pump, they're back in here trying to dump that big car or truck on us so they can buy a more affordable vehicle."

That's just the time, Funk says, that dealers don't want hard-to-sell trucks and SUVs filling up their used-car departments.

So that you don't fall into such a trap, here's how to think about gas costs and car purchases: If gasoline is $2.50 a gallon now, but has been averaging more than $3 a gallon for the past two years, plan for the higher fuel cost. Assume that it will cost you $3 or more a gallon to fill up your vehicle each month for the length of time you own it. (The average length of ownership these days is just over six years.)

If fuel stays below $3 per gallon, that's just extra money in your pocket. If it eventually climbs above that, the impact won't be quite so budget-busting.

The same would be true if you were about to buy and gas soared to $4.25 a gallon after averaging $3 for some time. The price is almost certain to fall again at some point.

There are several places to find average gasoline prices. GasBuddy.com goes back 11 years. The AAA's Fuel Gauge Report gives detailed state-by-state information for the past year. For national averages going all the way back to 1993, check the U.S. Energy Information Agency Web site.

Stay on the Middle Road

Let's say you're Jane or Joe Average in your driving, which means 15,000 miles a year: 55 percent of the time in city traffic and 45 percent on the highway, neither a drag racer nor a tortoise. That means you should take the middle road when it comes to figuring how fuel prices will affect your long-term love affair with that new car or truck.

If you are eyeballing a car that gets an EPA rating of 30 mpg overall, $2.50-per-gallon gas means it will cost you $104 per month to fuel up. If gas is $3 a gallon, you'll be spending $125 a month at the pump.

If gas prices are on a downward slide and you're tempted to buy something more fuel-thirsty, remember two things: That truck or large SUV may gulp a lot more fuel than the sedan, and the cost of that fuel may not always be as low as it is now. Remember: The longer you plan to own a vehicle, the less you should rely on the present price of fuel in determining how easily you can manage the monthly operating costs.

Filling up a 20-mpg pickup or SUV instead of a 30-mpg sedan may only add $48 to the tab every 1,250 miles when gas costs $2.50. But that fuel will cost $62 more for the thirstier vehicle if the price climbs to $3 per gallon. The truck or SUV fuel bill would be 50 percent more than the sedan's ($250 versus $166) if gas gets back up to $4 per gallon.

If your budget can afford the extra hit if fuel prices start rising, then go ahead and get the thirstier vehicle. But if an extra $50 to $100 a month would put a strain on the household budget, you may be better off brushing impulse aside and sticking with the more-fuel-efficient vehicle you initially considered.

Here's one more buying tip: Although it may sound counterintuitive, a period of plummeting gas prices might be the best time to go shopping for a fuel-efficient car. They aren't as popular when gas is cheap and dealers will be more likely to consider cutting deals than when gas prices are high and demand for fuel efficiency grows.