John Eichberger |
When we started the Institute nearly 11 years ago, we often declared – “No matter how good your solution might be, if consumers cannot access it, don’t want it or cannot afford it, it will fail.” Some may have thought that was a little doom-and-gloom, but think about it – consumers (aka drivers) are the ultimate decision maker. If the product selection before them does not fit their needs and budgets, they will seek alternative products. Which is one of the main reasons why the Transportation Energy Institute is looking so closely at the issue of equity – how can we ensure that all communities have access to cleaner, affordable transportation energy solutions? With that in mind, I started wondering how affordable transportation is today and in what direction is that affordability heading.
To give this due consideration, I think we need to look at a couple of variables. One, the price of vehicles. And two, the price of energy. Sounds simple enough, although anyone who has attempted such analysis understands the nuances that exist can make the evaluation extremely complex and lead to dozens of rabbit holes. Well, as is my preference, I like to boil things down to simple metrics while acknowledging that the details can skew the results – but let’s take a look at some generalities that can at least give us some insight into where we are today.
The bottom line of progress is this – if newer, cleaner vehicles become too expensive, sales will slow and fleet turnover (and thereby overall benefits of new vehicles) will also slow. More importantly, if the prices exceed the ability of consumers to afford them, they will be forced to extend the useful life of their vehicle, resulting in an older population of vehicles on the road and reducing the overall benefits of innovation.
When we look at the average price of new and used vehicles, it can be a bit alarming, especially when we consider the average household income in the United States in 2022 was $74,580 according to the U.S. Census Bureau, and that was down 2.3% from $76,330 the prior year.
Of course, the cost of living is not the same in every state and $76,000 can go a lot further in some markets than in others. So, the following shows the average income by state, which ranged from a low of $48,610 in Mississippi to a high of $108,200 in Maryland.
But, the cost of living does not really affect the retail price of vehicles, which are typically sold for the same prices regardless of where they are sold. In September 2023, the average MSRP for a new vehicle was $47,899, which was 63% of the average household income and 50% of the average income of residents in all but three states.
When we think about who can afford to buy what, it is valuable to understand the representative share of income. According to the Census Bureau, 33.9% of households earn less than $50,000 while 37.9% earn more than $100,000. When we consider this dynamic, we observe that the average price of a new vehicle is equal to the annual household income for one-third of American households.
So, if new vehicles are not that affordable for most consumers, what about used vehicles? Due to improvements in fuel efficiency over the years, replacing a 20-year-old vehicle with one that is 10 years old can yield tremendous benefits in terms of fuel consumption and emissions reductions. The average price of a used vehicle in September 2023 was more affordable than a new vehicle at $29,196. This value is less than 50% of the average income for residents in all but six states, but it is still pretty expensive, especially for the 23.3% of households who earn less than $35,000 per year.
As the charts above show, the past two years have seen an increase in vehicle selling prices, although recent months has seen prices come down relative to year ago prices. That said, since 2016, prices have been on a consistent increasing trajectory. New vehicle prices during this time are up 34% and used car prices are up 55%. At the same time, average household income has increased 22% – vehicle price increases have outpaced income.
The media is fixated on the transition to electric vehicles, but despite significant growth in this sector over the past few years, approximately 98% of vehicles in operation still operate on liquid fuels like gasoline and diesel fuel. So, if we want to understand affordability of transportation, we need to look at these sources of energy and then compare any alternatives to this benchmark. For purposes of this high-level analysis, we will only look at these dominant fuel categories in the market and allow the reader to extrapolate to equivalency for alternative energy options.
Since Memorial Day 2023, retail gasoline prices in the U.S. have averaged $3.672, according to the Oil Price Information Service. This compares to an average retail price the preceding 12 months of $3.338, an increase of 10%.
The increase in the above graphic seems dramatic, and gas prices can spur emotional responses as they often serve as a bellwether to consumer confidence. How could they not when posted on 20-foot signs on every corner? It is the most recognizable consumer price point in the economy. But how does this actually affect the typical American driver?
A typical driver is estimated to drive 13,500 miles per year, according to the Federal Highway Administration, and the average light duty fleet efficiency on the road is 24.16 miles per gallon, according to the Energy Information Administration’s Annual Energy Outlook 2023. This means this “typical” driver would consume 558.8 gallons of gasoline in a year. At the recent average price of $3.672, that driver would spend $2,052 on fuel in a year.
The following table shows the impact of fuel economy improvements on fuel expenditures, based upon a driver traveling 13,500 miles in a year. If a consumer purchases a new vehicle, they could save an average of $57 per month on fuel (using EIA’s AEO2023 fuel efficiency average for new vehicles). However, if we optimistically assume 10% down, 60-month note at 0% interest, they would still have to pay $718 per month for a new vehicle. Even in the “slightly improved fleet” scenario below with a used vehicle, using the same assumptions above, they would save $33 per month but then have to spend $468 per month on the vehicle.
Affordability is key, bottom line. To offset higher fuel prices, drivers must acquire more efficient vehicles or change their driving behavior, which is not always possible given the majority of miles traveled are not discretionary. However, if consumers cannot afford a new (or even a more efficient used) vehicle, they will not purchase one. The solution to affordability, and by extension improved emissions performance, is to ensure more efficient vehicles are attainable. But therein lies the conundrum – vehicle technologies that yield greater efficiency typically increase cost. Therefore, the alternative option is to deliver cleaner fuels at affordable prices for legacy and less efficient vehicles. But that does not always come easily, either and such fuels may come with tradeoffs that might limit their marketability.
I started this article with the intent to simply point out the disconnect between more efficient, lower emitting vehicles and the economic reality facing consumers. I wish I could conclude with a proposed solution. Alas, that remains elusive. The best I can share today is we must remain cognizant of the issue of transportation affordability as we pursue a lower emissions market, and recognized that affordability means very different things to different households. Let’s keep digging and perhaps we can find innovative options that might not represent a perfect solution but can provide an acceptable compromise that protects both the environment and consumers.