2009 12 Bugle essay - Clunkers

Recently, the government ran a "Cash for Clunkers" program.
You may have seen this email (spam) from "a friend in the oil business":
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A vehicle at 15 mpg and 12,000 miles per year uses 800 gallons a year of gasoline.
A vehicle at 25 mpg and 12,000 miles per year uses 480 gallons a year.

Therefore, the average "Cash for Clunkers" transaction will reduce gas consumption by 320 gallons per car per year.

The government claims 700,000 vehicles were sold, so that equals a savings of 224 million gallons per year.
224 million gallons equates to a bit over 5 million barrels of oil.
5 million barrels of oil is about 1/4 of one day's US consumption.
Also, 5 million barrels of oil costs about $350 million dollars at $70/bbl.

Can you believe it? We spent $3 billion to save $350 million.

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The friend "in the oil business" doesn't seem to know much 
about either the oil business or economics..

He seems to think that a barrel of oil = 45 gallons of gas. 
But the average, which varies among refiners, is about 19 or 20 gallons/BBL. 
Assuming 20, the savings would be 11.2 million barrels of oil. 
So the annual savings, at $70/barrel, is about $784 million, not $350.

He also assumes all the savings occur only in the first year. 
If one assumes the average clunker had 4 years of useful life left, 
then the total savings would grow to $3.136 billion. 

About a wash, EXCEPT that the $3.136 billion will be paid to our own people, 
and not to other countries. As such, it will stay in circulation here 
and add to the economy. Sent to other contries it is just a wealth transfer.

There are other nuances one could add to this analysis. 
There is the cost of building the additional 700,00 cars, for example. 
On the other hand, will oil plateau at $70? I think not. 
Gasoline prices are at a low now. Watch them rise.

The program itself may have been good or bad. 
I think I would not have voted for it myself. 
There would have been better ways of spending $3 billion I could think of.

John Burgeson