Car Editorial - June 2010

We are attempting to answer two key questions: “How are petrol and diesel cars performing in the market?”, and “is there a good case for used car buyers to look upon diesel cars more favourably?”

Historically the market has commanded a price premium for a diesel fuelled car over equivalent petrol, and this still holds true today. The following chart quantifies these premiums, at three years of age, and 36,000 miles, for each of the key market sectors.

The first and most obvious fact that emerges is that the premium payable is governed by the size of the car. So city cars and superminis are at £475 and £675 respectively, and the premium large and premium SUV sectors attract prices some £2,000 more than their petrol counterparts. It should be noted that there is a lot of price variation between models within the same sectors depending upon the merits of the individual petrol and diesel engines.

Premiums for diesel engined models by market sector

As a rough rule of thumb, the graduation in the amounts of these premiums at 3 years of age reflects the trend of higher premiums when they were purchased as new cars. So, for example, the privilege of owning a new lower medium diesel would have been at an additional cost of around £1,300, and for a premium upper medium car, it would have been an extra £2,000.

So having established that diesel cars cost more when new and are worth more at three years of age, does this equate to a higher residual value compared to equivalent petrol models? If we take the upper medium sector, the above chart refers to an average 3 year premium in values of just under £1,000. However, by expressing the values for this sector as a percentage of the original cost new we get an RV of 37.5% for petrol, and 34% for diesel. This is very broadly in line with the positions of petrol versus diesel in the other sectors. Importantly, it is a different situation to that of only a few years ago when there was close to RV parity between petrol and diesel cars.

As the share of the new diesel market has grown over the years, so too has the supply of used examples, and this ever increasing supply has not been matched with an increasing demand, leading to an easing of prices. Whilst there is some merit in this statement, it would also be true to say that the reduced supply of used petrol cars has not been accompanied by a similar fall in demand, which may have increased prices slightly. Our belief is that a combination of both these factors has been at play, but with more emphasis on the former than the latter.

In view of the current market position of petrol and diesel cars, does it make financial sense for consumers to be making a diesel purchase?
In last month’s Editorial we commented on the fact that petrol prices had just exceeded the previous record set in July 2008 of 120ppl. However, diesel prices were also at a record high at 128ppl but, since this time last year, prices have been very closely matched with those of petrol. After depreciation, fuel is the second largest cost of ownership, accounting for around 15% of motorists’ annual expenditure, but with a near alignment of diesel fuel prices, the argument for choosing a diesel car should have improved.

The table below shows the combined fuel consumption figures for a 3 year old family sized car. If we assume that annual mileage will be 12,000, and that the forecourt price differential between the two fuel types remains, there is a potential annual fuel saving for diesel of £240.

Fuel type	MPG (1)	Annual mileage (2)	Gallons consumed	Pence per gallon (3)	Total annual fuel costs	Annual fuel saving for a diesel car
Petrol	41	12,000	293	550	£1,610	£240
Diesel	48.5	12,000	247	555	£1,370

Based on annual ‘combined’ fuel consumption figures for 3 year old family sized cars.

Assumed annual mileage of 12,000pa.

National average fuel price in April 2010 (Source AA).

Having established that the purchase premium for lower medium car is about £750, it will be at least three years before this amount is recovered. In the case of an upper medium sized car with a purchase premium of £975, this outlay will not be recovered for at least four years. However, assuming that the period of ownership is for three years, a six year old family sized diesel should still command a premium of between £300 and £600. This supports the financial case for the diesel, provided of course that the relative used car pricing between petrol and diesel does not disadvantage diesel much further.

Our conclusion is that, purely on the basis of affordability, a used diesel makes better sense than it ever has done. Added to this, there is more supply, and that means more choice. This choice is not limited to body styles and specifications, but also means that there is more on offer to suit most budgets.