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Money Wise June

Buying a car in 2017

We all know about factoring a car payment and the insurance cost into purchasing a vehicle. But do we think about fuel? About whether ‘To shift, or not to Shift?’? What about Electric Vehicles? Well, we’ve heard your calls for more information (psychically, of course), so here you go!

Understanding Gas Prices

Internal combustion engines move most things in our society. The price of gasoline can dictate everything from your weekly grocery budget to whether or not you can afford a trip to the beach. Have you ever wondered where gas comes from and why its price fluctuates so much? It’s an enormous topic that you could spend years studying, but here’s a primer that will help you get the gist of it.

Gasoline and Oil

Over the long term (10 or more years), changes in the price of crude oil foreshadow proportional changes in the price of gasoline with a very high degree of accuracy. For example, if the price of oil spikes, the price of gasoline will probably jump soon too. This is because gasoline is derived directly from crude oil in a process called “fractional distillation.” In fractional distillation, crude oil is heated at different temperatures, so that as each component vaporizes, it may be collected separately, in a pure form. For each 42-gallon barrel of crude oil, 19 gallons of gasoline can be collected. Because crude oil is an actively traded commodity, gas prices change constantly to ensure that suppliers will be able to replace what they sell.

The Price of Oil

Crude oil is one of the most useful and widely demanded commodities in the modern world. Naturally, it follows that at an international level, the business of oil production and distribution can get political pretty quickly. Trade agreements and cultural disagreements between countries can cause dramatic price movements.

One of the major determinants of the price of oil is production levels from the Organization of the Petroleum Exporting Countries (OPEC). Together, OPEC nations account for more than twice the oil production of either the United States or Russia, the next two largest producers. Historically, this has allowed OPEC to strongly influence (if not dictate) the price of oil by adjusting production targets. However, in recent years, alternative sources of oil, like shale, have loosened OPEC’s market control.

From Station to Station

You may have noticed that the price of gas varies from one city to the next ¾ or even from one mile of road to another. This is because gas stations are often owned and/or operated independently and are able to set prices as they please. There are many factors that affect an individual station’s pricing strategy, but the main drive is the overall profit of the station. Convenience products sold inside the station generally yield a much higher margin than gasoline, so gas prices are set lower than the nearby competition in order to attract more business. However, prices set too low may cause a serious loss if the supply price spikes. In general, the idea is to set the price as high as possible while keeping it lower than “the other guy.”

You may wonder, “If stations are owned independently, then why do I see the same handful of gasoline brands everywhere I go?” The answer is that, while stations are independently owned and/or operated, they frequently sign exclusive, multiyear supply contracts with a particular brand. In return, a station generally receives marketing help, property improvements, and an assured supply in times of shortage.

Can You Hedge Against the Price of Gas?

Major industries use financial instruments like RBOB gasoline futures to “lock-in” their gasoline expense for the year and protect their balance sheets from dramatic swings in price. Unfortunately for an individual consumer, a single standard contract is for 42,000 gallons¾a lot more than your household will consume in a year. There are some hedging options for retail-level consumers, like buying shares in a gasoline ETF, but doing so will tie up money you could keep in better investments. Your best bet to protect against changing gasoline prices is probably to just budget for the worst-case scenario and hope for the best.

Manual vs Automatic Transmissions

Plenty of automobile buffs will tell you that cars with manual transmissions are superior in every way. However, the truth is that automatic transmissions might be just as good. So, which route should you take when buying your next vehicle

Different Mechanics

Like bicycles, cars employ a set of gears to achieve maximum efficiency from the engine at different speeds. However, switching gears at high speeds in a machine as complex as a car isn’t as simple as “jumping” a chain from one gear to another. There are two solutions: Manual transmissions rely on a human’s precise timing and ability to “feel” the gears to make the shift. Automatics rely on fluid dynamics and complex “planetary” gear systems to gradually transfer between different amounts of torque.

Price and Costs

Due to their relatively simple construction, manual transmissions cost less to buy, repair and replace than automatic transmissions. But they can be a double-edged sword. For drivers who know how to shift gears correctly, a manual may be less likely to break in the first place. However, inexperienced drivers who don’t learn proper shifting technique can quickly cause a significant amount of damage to a manual transmission.

Mileage

In the past, manual transmissions consistently achieved better gas mileage than automatics, due to automatics losing some efficiency to the fluid mechanics of a torque converter. However, modern automatics employ sophisticated sensors and computers to establish a solid connection when appropriate and minimize inefficiency. Which means that some automatics are actually more efficient than corresponding manual transmissions.

Depending on the model, it can go either way. When you’re choosing a car, check to see if anyone has performed an efficiency comparison between the manual and automatic options.

Road Feel

Some people believe that using a stick shift makes driving a more enjoyable experience. Once you have the hang of shifting between gears, driving becomes a much more engaging activity! The sense of being perfectly in touch with your vehicle and timing your shifts just right feels cool.

However, driving a manual transmission requires more attention than you may be used to. If you like drinking a coffee on your way to work, a stick shift probably isn’t for you. Also, if you live in a hilly downtown area, you’ll go nuts switching gears all the time in stop-and-go traffic. In such attention-intensive conditions, even the most experienced operators are likely to stall their cars once in a while.

Learning to Drive Stick

What do you do if you’re interested in a manual, but don’t know how to drive one? Most stick-shift drivers learned to do so at a young age from a family member or a friend willing to risk a little damage to their transmission. As an adult, if you don’t have an enthusiast friend, finding an opportunity to learn the finer points of driving a stick might seem tough.

Don’t lose hope! Lots of driving schools offer lessons in operating a stick shift. It will cost you more than learning from a friend, but you won’t have to worry about grinding their gears ¾ literally or figuratively.

Which to Choose

These days, there’s no clear winner between automatic and manual transmissions. If you want to feel a little slicker on the highway, and save a couple thousand on your car purchase, a manual might be just right for you. However, if you just want the easiest way to go from point A to B, choose an automatic.

Electric Vehicles: Where Are They Now, and Where Are They Going?

One of the hottest topics in technology these days is the electric vehicle. It seems like everyone either thinks the industry is on the verge of a worldwide disruption, or that all the buzz has no substance. If you’re not sure what to think, here’s a primer so you can follow the conversation and decide for yourself.

The First Electric Boom

This isn’t the first time electric vehicles have had traction in the United States. They were introduced to the market in the late 1800s and, near the turn of the century, nearly 34,000 electric vehicles were registered in the country. However, they were largely impractical luxury items for the wealthy. It wasn’t long until the powerful internal combustion engine defined the status quo for the average consumer.

Modern Electric Vehicle Terminology

There are some important distinctions to make when talking about the electric vehicles. Hybrid electric vehicles (HEVs) charge a battery during the braking process and require gasoline to get going. Plug-in Hybrid Electric Vehicles (PHEVs) can run either on gas or an electric charge, but their batteries are charged from an outlet. All-electric vehicles or “battery only” (BEVs) don’t have a gasoline tank or an internal combustion engine. They operate entirely from lithium ion batteries and electronic motors.

Although HEVs have been around for a while, most of the current excitement and discussion is about PHEVs and BEVs, because they can operate entirely without fossil fuels. From here on in the article, the term “electric vehicle” will be used to indicate PHEVs and BEVs.

The Current State of Affairs

In the last 5 years, sales of electric vehicles have risen from 17,800 in 2011 to 157,181 by the end of 2016. That’s an 883% increase in 5 years! However, despite the seemingly astronomical growth rate, those sales only made up 1.39% of the market for new cars in 2016. The growth is promising, but electric vehicles still have a long way to go.

Another way of looking at the current situation is to evaluate the electric vehicle infrastructure. According to the Department of Energy, excluding private stations, there are 15,727 electric stations with 41,790 vehicle charging outlets across the US. Compare that to just under 105,000 gas stations in 2016, according to the Bureau of Labor Statistics. Considering the low market share of electric vehicles, that’s a lot of charging stations. Some interpret this as an optimistic outlook for the technology.

The Future of Transportation?

Proponents of electric vehicles often tout the convenience of charging a vehicle in one’s home as well as cost savings from switching away from the relative volatility of oil-based gasoline to domestically-produced energy. Convenience and reduced costs aren’t the only predicted benefits though. Manufacturers of electric vehicles are heavily investing in and exploring self-driving technology. This has lead to much speculation of (nearly) accident-free roads, faster transportation times, and cities without the need for parking lots.

Although battery prices are falling, which will lead to more affordable models, electric vehicles are still significantly more expensive than their gasoline-powered counterparts. The federal tax credits that were designed to offset this cost have limits that are running out ¾ with no renewal in sight. Additionally, emissions standards for cars may become more lenient in the near future, de-incentivizing manufacturers from pursuing more electric vehicles.

Most experts seem to agree that electric vehicle technology has proven itself far too practical to disappear again. However, market adoption will likely be slow, and the utopian future free of parking lots may only begin to appear as our great-grandchildren reach driver’s ed. Lucky them!