For almost every new car buyer, one of the most common question to answer is which fuel option to pick? There are multiple fuel options available in todays world, however the question of Diesel or Petrol is the most dreaded one. We have seen multiple threads in Gearhead and at many places all over the Internet asking suggestions for which vehicle to buy and whether to go for Diesel or Petrol.
Decision Making is a very scientific method which can help us answer both the queries, i.e, which car to pick from a set of definite options with defined constraints, and which fuel type to go far with economics kept in mind. Here in this thread, we'll try to answer the second question.
I'll try and bring in mathematical calculation to show which fuel option might work for you best. Before we begin, lets list down few assumptions:
- The calculations are purely on finances, nothing else
- If you have personal liking for any particular fuel type, you'll not be much interested in numbers here
- Buyer is just an ordinary person out in the market to pick either a diesel or petrol non-commercial car.
- The calculation takes certain assumption on car usage and other parameters,though they are expected to differ from person to person.
There are many diesel engine fans ought there. I doubt they would even be bothered to read it.
Well, if you are still reading it means I can cut the crap and get straight to business.
When we go for a diesel variant of a car, we typically pay a premium price compared to its petrol counterpart. The difference is in range from 1.2L to 2.5L depending upon the model. This is what a car buyer sees upfront and does his comparison. But wait, there are few other things as well. For better understanding, let me take up a practical example and go about things.
Maruti Swift mid variant : VXI(Petrol) and VDI(Diesel)
Ex-Showroom price in Chennai are 5,09,000 and 6,28,000 respectively. Difference of 1,19,000! This is what we see and compare. However is that correct? Shouldn't we compare with the difference of their on road prices. Thats the actual diffence in amount that we need to pay. Diesel cars, with higher price tag attract higher road tax and insurance amount too.
The on road prices of cars come to 5,71,000 and 7,09,000. Difference of 1,38,000! So, is this the exact extra amount am I paying for Diesel car? Not entirely. If you are taking a car loan (most of us take it - it has numerical benefits too apart from assistance in affordability), then understand that on this extra amount of 1,38,000, you'll need to shell out extra interest too. For this car, let say that our fictional buyer has 3L cash with him, that would mean if he goes with petrol variant, he'll be needed to take loan of 2.71L, whereas for Diesel, the loan amount will be 4.09L. This would increase the total interest that he is needed to pay out. I did some calculation, and I understood that the total amount jump is in the range of 25-40% of the increased amount depending upon duration of loan and interest rate. For our assumption, lets see that the jump is in 25% range of total for the sake of us to take little liberty in favor of diesel. Should we add this to the cost of procuring diesel vehicle too? I mean had we gone for petrol, I'd have not been needed to pay that extra interest on my car loan.
Lets be logical and add 25% to the cost as well - total is coming to 1.72L.
Gosh! Did you ever think this far? The difference that looked like 1.19L to begin with is actually 1.72L. If I go for Petrol variant of this car, I can easily save 1.72L money for self. So is that all that I am managing to save, (or pay extra)? Is that the real monetary difference in petrol and diesel car? - Not exactly.
Lets make one more assumption around the running life of the car. For an average user, it typically lasts for 5-8 years. There are people who make their cars sit in garage in just 3 yrs and there are few others as well who run the car for 10-15 years. Lets not go to those extremes and take a rought estimate of car life to be 6 years, which I dont think is a bad idea. While we are at it, lets assume the car to have average annual running of 15000km. Meaning the car will run for 90k km roughly in its life time. Thats like 1250km every month. Roughly 40km every day non stop!
I guess this will be the case with most of us. Slightly more, slightly less! May be in some year, car will run 30k KM, however in someother year, it might clock only 6k KM in total. All in all, the assumption is that car runs for 1L KM post which, most of us abandon our cars anyway and move on.
Now, lets think that our fictional user actually went for Petrol. Meaning, he managed to save 1.72L with himself. If he puts that money to a simple FD, then this saving that he did will result in more than 9% per-annum return to him. If you are smart enought, you can get a better return than a simple 9% long term FD on your saving. Shouldn't we include this earning as well? Afterall, its a benefit or extra money you'll get if you chose to go with Petrol variant. If you had taken loan, than this retun will accrue to you in form of saving via installments and assuming you have gone for 2 or 3 yr loan, your entire saving will accrue to you in the same duration. For the sake of negating this interest acruing, lets assume that return that you'll get will be a bare minimum of 8% compount. All FDs give you compound interest. Below is summary of all the calculations we've done so far:
Annual Average Run 15000 Running Period 6 Price Difference in model 119000 Normal Road tax percantage of the price 16% Including Road Tax 138040 Loan Interest Increment Percentage 25% Including Interest Amt 172550 Price that you are paying Upfront for the Diesel Car 172550 Average Interest earning on this Amount 8% Total return Expected for duration of Running Period / Total Saving 273815
Your total saving is actually 2.73L!
Finding it unbelievable - eh? Go through the calculations once again if you wish to see if there is any thing wrong with it. There isn't! What looked like a mere 1.19L difference in Petrol and Diesel car, is basically a 2.73L long term loss thats getting incurred immidietely. Though we dont feel it as the entire loss is spread over years.
Now lets do a simple petrol and diesel cost comparison too, to understand the benefit in favor of diesel.
Petrol Diesel Rate Assumed 70 50 Mileage 15 18 Annual Fuel Consumption 1000 833.3333 Annual Fuel Cost 70000 41666.67 Lifetime Fuel Cost 420000 250000
I have taken an average cost of 70 and 50 for petrol and diesel respectivel for through out the 6 year period and the mileage assumed is 15 for Petrol and 18 for diesel. Again folks, these are assumed to an average figure for 6 year. Those simple assumptions and calculations say that after the life of car, I'd have spent 4.2L on my petrol and 2.5L on diesel cost. We are also assuming that other maintenance cost of both the cars are constant. This tells us that the total saving I'll do on fuel for a period of 6 years would be around 1.7L!
Lot of us would still be thinking that, hell, with better and higher run, this number will definetly look more positve. Yes, thats true! So, I increased the annual run to 25000km and life to 5 years. Total car running for 1.5L! I mean I doubt any non commercial guy would take his car to any more extreme than that. Even in that situation, the calculations come as :
Petrol Diesel Rate Assumed 70 50 Mileage 15 18 Annual Fuel Consumption 1666.666667 1388.889 Annual Fuel Cost 116666.6667 69444.44 Lifetime Fuel Cost 583333.3333 347222.2
Difference of 2.36L! I doubt we can ever achieve any more than this.
I am attaching the excel file here for you to download and play around with numbers. If you have read this post, I doubt you'll need any instruction to use it. Go ahead and try out various combinations with it - if you get any other interesting result - do share with us all.
With my this post, I sincerely don't wish to encourage or discourage in buying any particular vehicle, neither I want to present any biasness toward any fuel type. All I wanted to do is to present some numbers - hope it was all worth the work!