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Tuesday, November 29, 2011

Petrol vs Diesel: And the Economies of Scale



A brilliant article about the cost of owning a vehicle @ ZigWheels.


by Ravi Ved and Dilip Desai Pictures: Kunal Khadsehttp://static.zigwheels.com/images/bordot.gif Posted on 18 Nov 2011http://static.zigwheels.com/images/bordot.gif

For people who are still contemplating on whether to buy a Petrol or Diesel car J

Case - 1

With the prices of petrol skyrocketing, car buyers seem to be lining up to book diesel variants as they are highly economical and easy on the pocket compared to their gasoline counterparts. Well, that is only if you discount everything else and consider the running cost. We at ZigWheels take a look at the bigger picture and bring it down to simple numbers to find the cost-effective option between petrol and diesel fueled variant












We did the math to compare the cost of operation for an entry level Maruti Suzuki Swift petrol with the diesel variant. The difference in the cost of the two variants is Rs. 90,000 with diesel being the more expensive of the two; add to that the interest one would gain on the excess amount at 10% p.a if the petrol variant was purchased. The diesel variant being more efficient and the cost of diesel being Rs. 20/litre lesser than that of petrol, it saves a lot of expenses on fuel (See Case 1), but the cost of regular maintenance of the diesel variant is higher than that of its petrol equivalent. Taking all these dynamics into account, the running cost of a petrol car comes to approximately Rs. 4.93/km in comparison to Rs. 9.5/km for the diesel if both the vehicles are run for 15000kms annually. Increasing the annual mileage put on the odometer, the diesel is at par with the petrol variant if and only if a person does a minimum of 45,000kms annually.

CASE - 2

Low running? Wait for longer to recover costs

Now, it is understandable that an average Indian cannot put 45,000kms on the odometer annually considering the average run of an Indian being around 15,000kms per year. So does that totally rule out the diesel option? Well, no. Reverse calculating the amount of money saved on fuel (See: Case 2) by using a diesel car amounts to Rs. 30,500 annually after deduction of service costs for both the vehicles. Even so, after adding interest on the additional amount paid by a buyer at the time of purchase the diesel would be at par with the petrol variant mid-way through the third year. At the end of the fourth year with an annual running of 15,000kms, the money you would have saved in terms of running costs in a diesel would cover up the extra price you have paid, and you would have saved an extra Rs 9,700 as well. Only at the end of the fifth year do things begin to look rosy for diesels, with around Rs 40,000 saved in running costs over these five years.





What about depreciation?

Alright, so you finally made up the extra amount you spent in the initial invest of a diesel car, but what about depreciation? Assuming that both the variants have been reduced to half their cost after 5 years, you will still be losing more money in depreciation for the diesel, since it was a more expensive buy to start with.

The value of a Rs 4.95 lakh petrol car will be reduced by Rs 2.47 lakh at the end of five years. The value of a Rs 5.85 lakh diesel car on the other hand will be reduced by Rs 2.92 lakh – that’s Rs 45,000 lost straight in depreciation for a diesel.

This is an extreme scenario, we accept. The market dynamics for more-in-demand second hand diesel car space may result in lesser depreciation, and a better resale price. Either ways, the Rs 40,000 that a diesel user may gain after using the car for five years starts looking less rosy once you factor in depreciation as well.

Although, with the price of petrol is as high as Rs. 70/litre, the diesel may seem like a more affordable option, it may not necessarily be so. The diesel starts making economic sense for users who either have a run of 45,000kms annually or those who plan to retain the car for atleast five years or till the time they hit 50,000 kms on the odometer. And for those who have much less travelling to do in a car, the petrol still makes for a better buy.

What about the feel factor?

Although mathematics seem to be in favour of a petrol car unless you plan to retain a diesel for a prolonged period or drive seriously long distances within the first year itself, it is clear that the choice between petrols and diesels also has other angles that must be considered before making that final call.

Psychological satisfaction is of utmost importance to an Indian customer; and along with it comes the mental peace of not having to refuel a diesel car every few days unlike the petrol equal which is pretty much perpetually thirsty. But, simply the fact that the diesel needn’t be refueled very frequently doesn’t make it a more economical option. A diesel starts making sense only when you have a run of at least 15,000kms anything less than that and diesel will smartly fool you into feeling richer just because you end up filling fuel less frequently. 

It is not just the thirst for fuel of petrol cars that brings diesel vehicles into the lime light. The numbers before you clearly state, that you should consider buying a diesel only if your monthly run exceeds a 1000 kilometres. In fact our thesis was endorsed by Toyota at the recent launch of the Etios and Liva diesels, where they made it very clear that for a diesel to start looking rosy; one has to run it for nearly 2000kms a month. The numbers are before you, so remember that with a diesel, you would still be paying that extra cash for the first three-four years of running for the satisfaction of driving a diesel. It still is a case of different strokes for different folks, and choice still remains in the hands of the buyer. Hope this article helps you make a more informed one.





2 comments:

  1. I really cannot find the zigwheels article on the web. Did they remove it?

    My observations:
    • We should not be adding the capex cost of 90K along with the cost/km. Only the interest should be calculated in the part A (ie Rs.9000)
    • Petrol price in Bangalore is Rs 74.50 and Diesel is 45.38
    • If we redo the calculation with the actual fuel cost and with 12kmpl for petrol and 18 kmpl for diesel, then the difference for 15K km for first year would be Rs 44300/- for the first year. In that way, we will be the ROI for the diesel will be done in 2 years. So from the third year Diesel is profitable and the resale value additional value that one gets.
    • Similarly with the above point, the 45K km period is not really required for the break-even costs. Only 30K km is required.
    • Remember that all the petrol vehicles are not selling even after raining discounts and hence the automobile manufacturers are pushing different tactics to sell petrol vehicles. I am sure zigwheels has some interest in presenting it this way.
    • If you sell the diesel car after the break-even period, the difference money between diesel and petrol 2nd hand value is actually bonus.

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  2. The article seems to cover all the angles, but seems to miss the interest on the difference between running costs of petrol and diesel variants. Shouldn't that be added to the petrol's annual costs?

    ReplyDelete