If petrol prices are too high, you can convert your car to run on LPG and save money. The Australian government is giving $2000 to anyone who converts a car to LPG. There are two types of LPG systems available now, the old venturi-mixer system that costs about $2500 and the newer vapor-injection system that costs about $4500. The new system is better because there is no power loss, smooth idling, and good ignition. The new vapor-injection system also uses 10 per cent less LPG. However, a pure monetary analysis of the two systems shows that the old system is better (for me at least).
For of all I will make a case for conversion to LPG. I drive a Toyota Camry V6. Its rated fuel efficiency is about 10L/100km but I find it does about 12L/100km in the real world. LPG uses more fuel per kilometer. Its rated fuel efficiency is 16L/100km. Assume LPG costs $0.45 per liter and assume petrol costs $1.20 per liter, which is how it is now. This means it costs me $7.20/100km on LPG and $12/100km on petrol, which means I save $4.80 per 100km if I drive an LPG car. I drive about 9500km per year, so in one year I save $456. A conversion costs $2500 and I get $2000 back from the government, so effectively I pay $500, which means I recoup the costs in about a year of driving. And after I recoup the costs I go on saving $456 per year into eternity. Suppose that instead of investing in LPG I invested my $500 in shares instead. On average shares return about 10 per cent, but during boom time (like now) it can be higher. Last year if you invested you would get 22 per cent. If I invested in LPG I would recoup costs in one year and in the second year I would make about $500 and in the third year I would make another $500, so after three years I will have about $1000. If I invested in shares, assuming shares gives a rate of return of 10 per cent, then I make $665, so LPG investment is better. Its returns are roughly equal to that of returns from shares in boom time, but LPG investment is certain whereas with shares it may not always be boom time.
Now to get to vapor-injection. The vapor-injection LPG system costs $4500, so it costs $2000 more than an old-style LPG system. However, you use 10 per cent less LPG. Will you ever recoup the costs? Remember my car on LPG will have fuel efficiency of 16L/100km. I do 9500km per year, which means I use 1520 liters per year, and assuming LPG costs $0.45 per liter the car will cost be $684 to run in one year. If I save 10 per cent on fuel costs with this new vapor-injection system then I save $68.40 per year. That's it! Basically, if you put that extra $2000 in shares that return 10% you'd get $200 in one year, which is more than what you'd get in your vapor-injection system. If you want certainty you can invest in a cash savings account and get 6 per cent for sure, which means you make $120. This is still more. The vapor-injection system then makes no economic sense at all. It does make sense if you want performance and comfort, but if you cared about all that, why would you bother converting to LPG and lose space in your boot?
Now of course, my analysis works for me because I drive only 9500km in one year. If you do more kilometers then this new system may be appropriate. So let's start again. LPG costs $0.072 per kilometer, and if this new LPG system saves 10 per cent then you save $0.0072 per kilometer. Now if you invest your $2000 in shares you make $200. To save that much with this new LPG system you'd have to drive 27,777 km in one year. I don't do this much driving, but others may. Of course, this isn't a proper analysis. With shares, you make $200 in one year, but if you reinvest then you get $2420 the next year (you make $220 the following year). With you new LPG system you still get $200 the following year. That is, you make $20 less, and this is because with shares your returns are compounded over time whereas with LPG your gains are just a stream of income into the future, i.e. an annuity. I could do more complex stuff to make these two investments more comparable, but that would take too long. I doubt I will ever drive 27,000 km in a year.