Clunker Math

[tursiops]

http://www.snopes.com/politics/gasoline/clunkers.asp

[Diomed]

Here's a neat side story to this. My son is a tech for one of the large dealerships in the area and was involved in the normal destruction of the engines in a cluncker. It was a late 70's chevy van with a 350 c.i. engine. Now, the product that was poured into the engines while running would normally destroy a newer engine in short order. Well after the first application of the product, the engine was still running fine. It took 3 more applications to kill the motor.

They just don't build 'em like they use to. I'll bet an old Ford V8 would still be running.

Late '70s Detroit product? Must have been made on a Tuesday or Wednesday...

[zephyp]

Yup, government can only move resources from one group to another...it doesn't create or save anything.

Of course it does both...our government creates massive amounts of crap and saves millions of lazy Americans from having to work. Where you been for the past 50 years?

[gunderwood]

http://www.snopes.com/politics/gasoline/clunkers.asp

Yes, but even they got it wrong.

They harp on the original analysis for assuming that there are 42 gallons of gas in a barrel of crude. They assume a midpoint of 19.5 gallons of gas per gallon of crude (there are varying qualities of crude oil) and they use it to do this math:

191M gallons saved / 19.5 gallons per barrel * $75 a barrel ~ $735M

They then go on to explain that over 4 years the program will pay for itself, but they committed the same flaw as they just harped on the original analysis for doing. They assumed that refineries only buy crude oil and make money off of the 19.5 gallons of gas and throw out the rest. Of course you'd have to be an idiot to toss out all of the other products the remaining hydrocarbons produced. I.e. no one buys a barrel of crude to just make gasoline.

The simple, but wrong way to do it would be just take 19.5 / 42 ~ 46% of the crude oil becomes gasoline. Thus, $735M * 46% ~= $338M, which is very close to the original $350M stated and more than doubles the time for the program to pay for itself (now 8.6 years). This ignores the fact that by pay for itself we mean that some American's have saved enough money on gasoline to cover the costs the rest of us footed.

A better way to do it is to look at the total value in dollars of products commonly produced by US refineries per barrel of crude. That would give you a better adjustment, but...

1. Each barrel saved is one less barrel needed on the world market. That, by itself, should reduce the price of crude oil; i.e. demand was reduced. However, this is a world market not a US market so the savings would be distributed among the whole market, not just American's. It is hard to get exact numbers, but the use uses around 25% of the worlds crude oil, thus we should only see 1/4 of any savings induced by a price drop.

2. The US is a developed market so offsetting our oil consumption is really more of a subsidy for developing nations. I.e. it is not likely that the reduced demand and theoretically reduced price would actually benefit us as it would encourage people who aren't using as much oil as they would like (because of price) to use more because it is now cheaper. Most American's use all the oil we want, even at $3/gal gasoline. The developing world (e.g. China) does not. In fact, the Chinese government buys oil at the world market price and sells it for a reduced price internally to isolate their economic growth from the price of crude. This is particularly important because lots of Chinese electricity is generated by small diesels. Thus, any demand we reduce countries like China will simply pick up because they are limiting their demand because of price.

3. The other half of the barrel of oil makes other products. Those products have enjoyed a reduced cost of base components (from the crude) because the demand for gasoline is so high. I.e. we need X gallons of gasoline which produces Y amount of other hydrocarbons (which are useful for other products), but it is likely that those products would never demand as much as is available if gasoline wasn't flooding the market with cheap byproducts. If we reduce our gasoline consumption, for some markets, that may actually make demand higher than supply which now means the price of those other products must go up. Thus, yet other American's will pay more for all the other products.

On and on, etc., etc. So apparently Snopes got it wrong too, but the original post, while making mistakes, was actually closer to the truth of how many years it would take to pay off the clunker program. Even more advanced analysis says it is probably far worse than 8.6 years, but paths not taken are impossible to state explicitly what would have happened.

Edit: Worse yet, how many of those clunkers would have gone kaput in 8.6 years (or whatever the number actually is)? I'd bet that most of those clunkers wouldn't have lasted that long. Thus, those people who turned them in would have had to buy cars in a few years anyways, but just without the subsidy. However, since they bought them earlier than they would have future demand for new cars has been reduced. That is the fundamental problem with all stimulus spending, it just shifts demand forward so you end up doing less later on and never achieve true growth...you also have all the interest you have to pay since we borrowed it from the Chinese, so technically it should be a net negative.

[gunderwood]

Yup, government can only move resources from one group to another...it doesn't create or save anything.

Of course it does both...our government creates massive amounts of crap and saves millions of lazy Americans from having to work. Where you been for the past 50 years?

[zephyp]

Yup, government can only move resources from one group to another...it doesn't create or save anything.

Of course it does both...our government creates massive amounts of crap and saves millions of lazy Americans from having to work. Where you been for the past 50 years?