So if you’re Chrysler, you’re looking over your sales figures for April 2008 and see you’ve dropped 23% compared to the same period last year.  The only cars actually selling better than last year are hybrid’s (like Toyota’s Prius) and compacts like the Ford Focus.  Not good news for a company who relies on selling big trucks for the majority of its revenue.  How are you going to get customers back into the showroom?   By taking gas prices out of the equation.

This month Chrysler introduced its “Refuel America” program, which offers to cap your gas costs at $2.99/gallon for the next three years.  (More or less… the actual number of gallons of gas guaranteed at that annual price vary depending on the fuel efficiency of the model, but it’s intended to take you 12,000 miles a year.)

So is this a good deal or a cheap psychological stunt?  And is it a smart move for Chrysler?  The first answer, at least, depends a lot on the vehicle you’re thinking of buying.  (You were thinking of buying a new car anyway, right?  Because no dealer incentive is really good enough to make you take the plunge if you can live with a nice pre-owned vehicle.  Forget gas prices; it’s the depreciation that soaks you.)

 Check out the full rules with detailed gallon allotments here:

http://www-5.chrysler.com/en/refuel/includes/print_rules.html

Let’s look at something like the Chrysler PT Cruiser, where the incentive offers $1000 cash + $2.99/gallon for 1636 gallons over three years.

Right now, the retail price of gas is just under $4/gallon. So that’s about a $1/gallon spread for Chrysler… assuming that they’re paying straight retail back to the vendor. (It’s possible that as part of this program, Chrysler has negotiated some sort of discount with gas vendors, but let’s ignore that for now.)

If gas prices don’t go up, then Chrysler is paying you the equivalent of ~$1,600, spread out over three years. (Note that the offer is written for 87 octane unleaded fuel, with a $0.15/gallon surcharge for 89 and $0.30/gallon for 90+ which about matches the pricing differentials at the pump today.) The deferred payment is good for them, bad for you, but we’ll overlook that bit too; it’s not going to tip the scales either way.   (If you had $1600 cash and invested it @ 4% annual return, you’d have about $1,800 at the end of three years.)

The real question is: what happens when gas prices continue to climb? Between 1974 and 2004, gas prices rose from a national average of $0.50/gallon retail to roughly $2/gallon. That’s an average increase of a little under 8% annually. But in the last three years, the seasonally-adjusted increase has been closer to 25% annually (e.g. see http://www.californiagasprices.com/retail_price_chart.aspx).

So if gas keeps rising @ a rate of ~20% annually, you’re doing great! In July, 2009, you’d be paying more than $6.50/gallon, and Chrysler will have saved you about $3,750 filling up your PT Cruiser. If we’re all a little luckier, then maybe we’re only paying $5.50/gallon in 2009 (about a 12.5% annual price increase), and Chrysler’s still put about $2,750 of gas money back in your pocket. 

Of course, nobody knows how high (or low) gas prices are going to go. But based on previously offered cash-back incentives, Chrysler’s got be going a little deeper into pocket for this offer. It may be worth it for them, though — Refuel America is offered as an alternative to lower APR incentives, so for buyers who finance through Chrysler, there’s still a bunch of $$ to be made over that three year period in interest fees.

Contrary to what seems to be popular opinion, I don’t think this is just a gimmick to mislead consumers. If you were in the market for a new vehicle anyway, I’d say there’s almost certainly more value in $2.99/gallon for three years than $1,000 (remember, many of the Refuel America promotions are still giving cash back in addition to the gas price lockdown).  

Whether it’s a great idea for Chrysler really depends on a lot of variables outside the scope of gas costs. We don’t know what the financials look like on the back end.  For example, I’m sure Chrysler has limited their downside exposure with some sort of insurance policy.

But we do know that Chrysler’s sales figures continue to fall, and concern over the cost of gas is a big reason why (as evidenced by the growing sales of more fuel-efficient vehicles.)  I have no idea how much the company’s stock price gets slammed if they come in with miserable second quarter sales figures, but I’m betting their CFO does and is willing to pay a little more down the road to avoid that immediate hit.