Diesel or Petrol?

In January 2012, a litre of petrol cost Rs 25 more than a litre of diesel. This wide gap, which was steadily increasing, prompted many car buyers to choose diesel cars over petrol ones. But since last September, the gap between petrol and diesel prices started shrinking and is now down to around Rs 13.

Also, with the slowdown in the auto industry, many car-makers have been offering discounts and freebies to entice car buyers. So should you now go for petrol cars instead? No, suggest our calculations based on enquiries with car dealers. Diesel cars continue to be easier on the pocket, despite diesel becoming dearer and petrol becoming cheaper. Here’s why.

LOWER RUNNING COST

Let’s play the devil’s advocate and list the disadvantages of diesel cars. They involve a higher initial capital outlay (up to Rs 1,50,000 or more depending on the models) compared with petrol cars. Diesel vehicles also involve higher maintenance costs, insurance and interest expense on the loan taken to buy the vehicle. And, of course, the slowly rising prices of diesel itself.

But despite the reduction in the price gap, diesel is still around 20 per cent cheaper than petrol – a litre of diesel costs Rs 52.9 in Chennai compared with Rs 65.9 for petrol. A diesel car also offers better mileage, around 3-4 km more than its petrol variant.

This combination of lower fuel cost and better mileage translates into substantial savings. This more than makes up for the higher initial capital outlay on diesel cars. Diesel cars also have better resale value – our enquiries with dealers indicate that they depreciate less than their petrol variants. Rising consumer preferences for diesel vehicles also raises the resale value. This blunts much of the disadvantage diesel car buyers suffer on account of higher initial cost. In short, diesel cars make economic sense from a total cost perspective (see table).

We have considered the comparative cumulative cost difference after a period of three years, which is the minimum car holding period for most people. Contrary to popular perception, our calculations show that diesel cars have an edge even when vehicle usage is low (around 20 km a day) to moderate (around 40 km a day). As usage increases, diesel cars offer greater cost advantage.

ADVANTAGE TO REMAIN

The gap between diesel and petrol prices has shrunk due to a sharp rise in diesel price last September and the monthly 50 paise hikes initiated since the beginning of this year. On the other hand, the price of petrol – a deregulated fuel – has moderated in recent months with cooling global crude oil prices.

But the scope for the gap shrinking further is limited. Currently, the notional loss on diesel suffered by oil companies is around Rs 3, the limit to which diesel price could possibly be hiked.

Even if this is done (while keeping petrol price constant), the gap will remain at a significant Rs 10 and diesel will still be more than 15 per cent cheaper than petrol. At this level too, calculations indicate that diesel cars would be economical.

Our enquiries with dealers suggest that on some car models, discounts are being offered only on diesel variants. The increased customer demand for diesel cars last year seems to have led to a situation of over-production and stocking up at the dealers’ end. Discounts strengthen the case in favour of diesel cars.

It also helps that improvements in technology have helped diesel cars these days provide a good driving experience.

Source- http://www.thehindubusinessline.com/