2010-01-04T08_16_38

The Economics of the Chevy Volt

It has been announced recently that the price of the Chevy Volt will be set at $41,000. So the Volt won't be priced to be a car for the people - it costs $24,000 more than a Ford Focus.

This leads to an uncomfortable, but obvious, question: How much gas could you buy for $24,000? Well, with gas at 3 dollars per gallon, you would get 8,000 gallons of gas. And with your Ford Focus, getting something like 35 miles per gallon, you could fuel your Ford Focus for 8,000 x 35, or 280,000 miles with that money.

And, even if you buy a Chevy Volt, your miles will not be free. What you pay in electricity and gas will depend on the number of miles that you drive each day. Most people will have some days when they only use the batteries, and some days when they will need to use the gas powered motor. Let's guess that on average the Volt achieves an impressive 70 miles per gallon.

If we further assume that the average customer will be traveling 15,000 miles per year, in today's prices, the fuel cost for a Volt per year will be 3x15,000/70 (=$643) and for the Focus 3x15,000/35 (=$1286). So, the Volt will save money every year relative to the Focus, around six hundred dollars in fact. (For the sake of analysis we are assuming that maintenance costs are the same for both cars).

In order for a Volt owner to beat a Focus owner in terms of total expenditure, the two cars would need to be kept for 40 years (24,000/600). As the life expectancy of a new car is, according to Consumer Reports, 8 years, it is clear that buying a Chevy Volt is an economic disaster.

So, what happens in economic disasters? The government subsidizes! In this case the US government has decided to throw $7,500 into each Chevy Volt purchase. This slightly reduces the size of the economic disaster for the consumer, but does not change the fact that money is being thrown away with every Chevy Volt purchase. It is just tax payer's money that is being burned, not the consumer's

The major component of the Volt, its battery, is made in Korea. It is estimated to cost something in the region of $10,000, so a large portion of the purchase price and profit of the car are sent to Korea. Additionally, creating those batteries takes a huge amount of energy, and therefore leads to the production of a great deal of CO2.

The US government has decided to limit its exposure to Chevy Volt sales, so only the first 200,000 cars sold will be subsidized by tax payers. So the potential downside to the economy is only $1.5bn. But, the government hope, that by the time this sum of tax payer largess is invested, fashion trends will be set such that consumers will be happily burning their money on Chevy Volts.

But even then, the most disappointing thing about the Volt is that all the money that is required to subsidize it, from both government and consumer, has to come from somewhere. And that money will be earned through activities which create CO2, so the net result of the Volt will be an inefficient tax on society, and increased CO2 production.

The bet with the Chevy Volt is that fashion trumps logic. History would seem to indicate that this gamble is quite safe. American consumers are interested in little other than fashion. A car has always been more a statement than a means of transportation. In this case we have a car which says: 'I care about the planet, but I am not very good at arithmetic'

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