The end of the ICE Age

Rapidly increasing fuel costs are making gas burning Internal Combustion Engine ( ICE ) cars less and less affordable to drive. Can rapidly improving the fuel efficiency of cars keep them viable?
Let’s look at used car depreciation – using an average depreciation curve from 50 years of accumulated wisdom:

This chart shows an average depreciation curve for a $27,000 car ( $27,000 was the average cost of a new car this year ). The left axis is the price to buy the car used after each year it gets older. The right axis is the monthly payment to buy that used car with a 5 year car loan at 4%. The “traditional” depreciation has the car retain about half its value after 5 years and about 25% of its value after 10 years. This traditional depreciation curve shows the discounted value of the old car, based on the collective experience of the reliability and desirability of an old car.
An old car is a little more worn and creaky than a new car. It doesn’t have the newest features, but most importantly it has a much higher probability of failure, leaving you stranded or saddling you with an expensive repair.

Now lets look at a new car 20 years ago and include the cost of its fuel:

The absolute dollar amounts aren’t important, just the curve. 100% on the scale is the total outlay at the most expensive point – brand new. The red is the cost of gasoline to operate the car, assuming that the car is typical of its time ( 22mpg, drives 12000 miles a year and gas starts at 1.15 a gallon and increases at 2% per year. )
The curve is very similar for most of the years from 1960 to 1990 except for short periods of high volatility.
The green line is the total amount you pay to own and operate that car, I call this the “historical total monthly expense”. It represents a reasonable constraint on what you are willing to pay for a an old car – note that in the first year the cost to fuel the car starts out at about 10% of the total and after 12 years the cost of fuel has risen to about 40% of the total because it has ticked slightly up while the value of the car has dropped.

Now let’s look at a car today:

This chart shows the original payment number in blue ( calculated from the historical depreciation curve ).
The red line is the cost of gasoline per month, assuming a 30mpg gallon car ( todays average new car ) with $3.60 per gallon gasoline, that is projected to increase at 6% per year more than inflation.
Gasoline has really been increasing at 8.5% per year for the last 10 years, but the government claims that inflation is only 2.5%, so gasoline is increasing at 6% per year more than inflation.
The green line is the total cost to own and operate the car.
The purple line is the “historical total monthly expense” of payment + operating cost.
This is today’s scenario, where the total cost to fuel the car starts out at about 18% and after 12 years would be 75% if traditional depreciation values held.
Notice that the green line and the purple line are very very different.

Now let’s look at that same car but try to constrain what you are willing to pay for it to the “historical monthly total expense”:

This chart shows what you should actually be willing to pay for such a car, if it conforms to the traditional value proposition for a used car. If you constrain yourself to not exceed the historical total monthly expense curve, then what you are willing to pay becomes = historical total monthly expense – monthly cost of gas. The operating cost has risen so much, that at 10 years, the car is essentially worthless.
Conforming to this curve is not any kind of economic law, its more of a quantification of the feeling “I am not going to pay anywhere near as much to drive an old car than a new car”

This chart shows the same scenario for a car in 2021, if that new car now made 35 mpg – but gasoline continues to rise at the same rate.
When you initially purchase the car, the cost of gasoline is already 32% of the cost to operate the car per month.
Its used value plummets quickly and becomes negative shortly after owning it for 6 years.

The standard value proposition of the used car is quickly destroyed. This is because the cost to fuel it is very significant the very first year, but very shortly it dominates the total cost to own the used car. The fact that the car manufacturers are going to have to dramatically improve the fuel efficiency of the cars very rapidly to make them affordable at all, will make older cars obsolete so fast they will have little value. This will happen so fast that even a 6 year old car will be worth very little.

But car manufacturers are going to raise efficiency even faster than 5mpg in 10 years to battle the rising cost of gasoline right?
Lets look at the scenario from the opposite point of view:
Its 2021, and you are trying to choose what car to buy. You evaluate a new car and used cars up to 10 years old.

This chart shows the average cost per month of gasoline for a new car on the left and a 10 year old car on the right. We assume that the cars are similar price but each year older car gets 1 less mpg – with a new car getting 40 mpg. ( This represents the cars improving at 1mpg per year between now and then. There are many ways to mprove the fuel efficiency of a car and only some increase the cost or decrease the size, you can change aerodynamics, weight, power, rolling resistance, engine technology. Probably multiple variables will need to change. )

This chart is my attempt at calculating a smooth curve of the relative value of these cars.
The green line is the traditional car value ( depreciated value + operating cost line ) as before.
The blue line is the new car value line ( depreciated value + operating cost )
The red line is the actual value of each car.
Notice that a 10 year old car instead of costing you about 38% of the new car to own and operate, is about 44%.
But the value of that 10 year old car is near zero.
In fact the value of the 5 year old car is under 25%, whereas in the past it was near 50%.

Is there a conclusion? Yes. Here is mine. The traditional value proposition of a car is that you pay for it with a 5 year loan and when the loan is over, you have something about half the value from what you started with. In 2021 if you buy a new ICE car you will be looking at something that is very likely to have insignificant value within 2 years of completing your loan term.
I think that by 2021 buying an ICE car will be an unattractive proposition for a great many reasons, and this is a very significant one. Nobody will want to invest such a huge amount of money into something that becomes worthless so fast.

Here is my wild prediction: by or before 2021, the sales of new ICE passenger vehicles in the U.S. will fall well below half of the per year peak ( which I believe was 17 million in the years 1999 to 2007 ) and the ICE age will be officially over.

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3 responses to “The end of the ICE Age

  1. Interesting analysis. Personally, I find it intuitively obvious that the ICE is on its way out. I’m not so bold as to try to predict an exact date — entrenched technology has a funny way of sticking around a lot longer than is really necessary or wise — but I look forward to seeing whether your prediction pans out. 🙂

    I do have one minor nit to pick with your article. You write: “An old car is a little more worn and creaky than a new car. It doesn’t have the newest features, but most importantly it has a much higher probability of failure, leaving you stranded or saddling you with an expensive repair.”

    I would be interested to see some real documentation of that claim, in a way that compares the true economics between maintaining an existing car versus purchasing a new one.

    In our own case, we own three vehicles, the newest one being 14 years old. The oldest is 23 years old. It continues to be far less costly to maintain these vehicles than it would be to purchase new ones, and that’s even in the face of increasing parts costs because of relative lack of demand and accounting for any potential savings in energy costs due to purchase of a new higher-mileage gas vehicle, or an electric vehicle. Per-year maintenance costs for each of these vehicles is less than $1000.

    Our biggest risk factor is the screwed up way that vehicle insurance works, such that if someone else runs into us and does more damage to our car than the current average retail value of it would be, nothing in the act of “totaling” the car accounts for the money we’ve spent to stay on top of maintenance (i.e. sure we could replace the car with another of identical vintage but there’s no way to ensure that the replacement has the same maintenance characteristics as the one that was discarded).

    For each vehicle owner, with different driving patterns and needs, there will be a different break-down of related costs, especially fuel. For many, a new vehicle can be justified due to the number of miles they drive.

    But I think that arguing in favor of purchasing a new vehicle on the basis of maintenance costs probably isn’t justifiable, unless you’re only going to consider owners who never do any preventative maintenance and just drive a vehicle until it breaks down somewhere (which would be IMHO a prejudicial assumption). In general and all else equal, with proper maintenance an existing vehicle is going to be less expensive to own than throwing it out and replacing it with a brand new one. The manufacture of a new vehicle represents a huge embedded cost, one much greater than that required to then keep that vehicle on the road.

  2. highspeedcharging

    I didn’t mean to imply there was an economic argument to purchase a new vehicle over a used one because of reliability/maintenance costs.
    I was just trying to point out that the reduced value of an old car is the “consensus wisdom” on what people are willing to pay.
    Someone who meticulously maintains their older car has something much more valuable than someone who does not. The buyer of that used car can not easily distinguish between the two – and that usually drags the value of a well maintained car down towards the average ( poorly maintained ones ).

  3. I’m now driving a totalled (!) car after being rear-ended (it just needed body work, but it was old, so it had a low assessed value).

    The fact is that resale value for a well-maintained car is not a smooth curve, because it flattens out at something a couple of thousand dollars above scrap value.

    I like the analysis. It agrees with my thinking: the resale value of ICE cars is going to drop to the floor very fast, so buying a new ICE now (or in 2020) will be very unattractive, since most of the initial cost will vaporize the moment you drive it off the lot. (Right now, the traditional saying is that it loses 50% of its value when you drive it off the lot; this may become more like 90%.)

    But I think used ICE cars are going to continue to sell for quite a long time, because once you’re buying a car at only a little above scrap cost, it retains its value almost completely — so buyers will compare cost-to-fuel plus maintenance with total-cost for a new electric car. This number will keep the used ICE looking attractive for a long time, though the worst-repair-record and worst-mileage cars will start going for scrap rather quickly.

    Now, skyrocketing gas prices will mean that TCO for such a used car may exceed TCO for a new electric sooner rather than later, but people in the used-car market are generally capital constrained and subject to large financing costs (if they can even get financing). Accordingly, I think people exiting the used ICE market will not purchase cars at all, and will be switching to bikes and public transportation. (This is already happening.)

    We’ll probably see an enormous pileup of used ICEs in rural areas where this is infeasible (the same areas which already have multiple ancient cars sitting on their lawns). This phenomenon won’t end until lots of gas stations start closing due to lack of demand (when would you guess that will happen?) or the used electric car market starts to really heat up (and I think that will take quite a while, as most people will hang on to their new electric cars for a long time).

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