Does Cash for Clunkers Math Add Up?
Is the Cash for Clunker's program a taxpayer's nightmare?
There is an email floating around the internet that claims that the United States' "Cash for Clunkers" scrap car government program costs taxpayers more money than if it didn't exist. Have you read something similar before? One version of the email goes something like this:
A vehicle at 15 mpg and 12,000 miles per year uses 800 gallons of gasoline per year.
A vehicle at 25 mpg and 12,000 miles per year uses 480 gallons a year.
So, the average scrap car transaction will reduce US gasoline consumption by 320 gallons per year.
They claim 700,000 vehicles were recycled — so that's 224 million gallons/year.
That equates to a bit over 5 million barrels of oil.
5 million barrels of oil is about one-quarter of a single day's USA consumption.
And, 5 million barrels of oil costs about $375 million dollars at $75/barrel.
Therefore USA taxpayers spent $3 billion to save $375 million. How good a deal was that?
In 2009, the government junk car incentive program "Cash for Clunkers," provided consumers with $3500-4500 in incentives for trading inefficient old vehicles and scrap cars in return for purchasing new fuel-efficient vehicles. The simple analysis presented in the email states that the Cash for Clunkers program basically spent $3 billion in taxpayer dollars in order to save $375 million in oil purchases. On the surface that looks like squandered funds, right?
Let's look at this a little deeper. According to the latest Cash for Clunkers statistics, auto dealers scrapped a total of 690,114 transactions. Cars traded in averaged 15.8 mpg, while new vehicles averaged 24.9 mpg. If we say that the average motorist drives 12,000 miles per year, we can calculate the following:
A vehicle averaging 15.8 mpg driven 12,000 miles per year uses 759.5 gallons of gasoline per year.
A vehicle averaging 24.9 mpg driven 12,000 miles per year uses 482 gallons of gasoline per year.
Therefore the average Cash for Clunker transaction will reduce U.S. gasoline consumption by 277.5 gallons of gasoline per car annually. The total amount of cars scrapped with the Cash for Clunkers program will therefore save a total of 191.5 million gallons of gasoline per year.
The Achilles' heel is the next assumption...
The email claims that 224 million gallons of gasoline equals 5 million barrels of oil, meaning one barrel of oil produces 45 gallons of gas. This is incorrect; one barrel of crude oil holds 42 gallons of crude oil, not 42 gallons of gasoline. Don't forget that the crude oil has to be put through a refining process before it becomes gasoline. A typical refinery produces 19-20 gallons of gasoline from one barrel of crude oil.
If we take the mid-point of that - 19.5 - and multiply it by the $75 per barrel price quoted in the example, that equals 9.8 million barrels of oil. At $75 a barrel that is $735 million. This number is almost twice the $375 million figure! On top of that, gas benefits from the Cash for Clunkers program reduces oil consumption needs year after year. Since the cost of the program was $2.9 billion, the program would pay for itself in about four years, if the price of gas is constant (which is anything but).
The email doesn't consider direct and indirect benefits of the Cash for Clunkers program, including environmental advantages of reduced pollution, economic boost of increased auto sales, generating a bustling parts and raw materials market, and better safety standards of the newer cars. Rest assured the Cash for Clunkers program and therefore our Retire Your Ride Canadian equivalent, has a direct economic benefit to all of us.