Hybrid economics

Leanardo hearts his PriusWhen fashion and function collide, great things happen. Or, at least, trendy things that aren’t as vacuous and faddish as they may seem; things that can actually be justified to your friends, yet leave you reveling in their very hipness. And so the hybrid went from design exercise to cult item to Hollywood high fashion, and the justifications flew.

Until now. The new Consumer Reports auto issue contains a stark report on the economics of hybrids: the premium over a comparable model from the same manufacturer ranged from $3,700 to $13,300 over the first five years of ownership. Ouch.

Studies like this one from UC Davis suggest that most people don’t focus on the economics of hybrids, buying mainly for image reasons. Similarly, no economist would ever suggest buying a TerraPass — global warming is by definition a tragedy of the commons. But others are adamant that consumers make rational economic decisions and that hybrids have a strong business case, something the CR article attempts to clarify.

There are weaknesses in the CR analysis, as well as implied value judgments that CR does a good job of noting. One of the added costs that CR figures in is extra depreciation, based on the original purchase premium and on the theory that hybrids aren’t going to hold their value.

Fads are, by nature, transitory, and technological change may bring us an uber-hybrid in four years, but I suspect that hybrids won’t depreciate that fast. Depreciation is an issue if you sell the car (or total it), but, if you hang onto your car longer than the average of five years, the impact of this steep initial depreciation will decrease even as the benefits continue to build.

Fuel costs, perhaps the most debated part of the economic question, are variable. For the CR report, they assumed 15k miles a year, with gas starting at $2.50 a gallon and climbing to $4 a gallon, a seemingly hybrid-friendly estimate. For people who drive significantly more, the increase in savings helps offset the purchase premium, but may also be accompanied by higher repair costs, such as the $3000 hit for replacing the battery pack (every 150,000 miles or so).

Finally, CR assumes you’ll be financing the car, and will pay extra interest based on the purchase premium.

So for high-mileage drivers who pay in full and keep their cars more than decade, a hybrid may make sense from a strictly economic standpoint. For the rest of us, it’s debatable, but there is one critical thing all TerraPass people know: the hybrid will burn less gas, period, and each gallon saved is twenty fewer pounds of carbon in our atmosphere.

It’s hard to put a price tag on controlling global warming, but I’d be willing to bet that it’s worth a little extra.

UPDATE: Consumer reports announced yesterday that they had erred in their calculations, and that the original data (on which the above post was based) was deeply flawed. As a result of the corrections, CR now says that, as long as the federal tax credit still exists, Prius and Civic Hybrid owners will save money in the first five years, and the extra cost for the other vehicles drops by about 50%. The biggest error was in their depreciation calculations. The article has already been rewritten on the CR website.

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  1. Marcelle - March 8, 2006

    There is such a desparity in what is feasable for the haves and the have nots. While you point out the benefits outweigh the cost for the purchase of a hybrid the reality is that there are more have nots where we sit at the poverty level and have to decide on food or gas, shoes or toilet paper. Until the market reflects a more attainable MSRP it will remain out of reach for many regardless of their desire to participate in reducing carbon waste. I for one would love to be responsible for my impact on the environment by trading to a hybrid but the auto industry is not making it financially possible.

  2. JS - March 8, 2006

    CR is an organization based on assessing “consumer value” in mainstream ways, primarily focusing on short term and money considerations. In an economic market that puts no value on environmental destruction, buying that cheaper V6 with leather alternative to hybrid models may look like better value. But on the value front is CR factoring in the superior performance of hybrids, as prooven by their use as taxis with virtually no performance issues? Braking systems that last 3x as long due to the regenerative alternative to throwing energy away in friction brakes? Motors are more dependable than IC engines. IC engines that don’t run as much last longer and require less maintenance. When feedback mechanisms allow you to drive more efficiently, that also happens to be less wearing on the vehicles mechanical components.
    I offer one other consumer value that CR is overlooking entirely. That is the sheer pleasure of driving an automobile that is quieter and smarter (through better feedback monitors) than any IC alternative. Real people spend money to buy what they want, and once they drive a hybrid, they appreciate the pure pleasure of a machine that does not infringe on your ears, environment, or time required for refueling. In this world that has value.

  3. Kim - March 8, 2006

    I own a 2004 Honda Insight which was not compared in the tables, probably because its base model is no longer sold (CRX). My average mileage over the life of my car (39,000 miles so far) is 60.8 mpg. There is no question in my mind that I paid a premium for the car at $19K, but I am also recouping that premium rapidly with the price of gas over $2.
    I was surprised at the mpg values for the hybrids used in the charts. Is this all those models are getting?

  4. Terry - March 8, 2006

    Have we really come that far in saving gas? One of my colleagues has a hybrid. His average gas consumption about 38-45. The original Mini back in the UK in the sixties had similar gas consumption. It would hold four passenger uncomfortably and was a bit like driving along in a shoe box. Have we made much progress?
    The most curious thing about the CU report is not the hybrid but most of the new cars listed had a gas consumption of around 15 mpg, which is outrageously high.

  5. Diane - March 8, 2006

    And now Consumer Reports admits that they got the numbers wrong! The hybrids are far better than they claim – even the Accord and other large ones cost only a small amount more (I think $1-3K), while the Civic and Prius result in a few hundred dollars profit over the 5 years. What a blow to hybrid marketing as the result of an error.

  6. hunter walk - March 8, 2006

    strangely i view my Prius as an investment. Not one with great financial benefits to myself but in helping prove and grow a market for smarter, more environmental friendly cars. If my ~$3k “loss” helps car companies climb the technology curve towards even better alternative energy technologies and helps sustain the market, well, that’s all i want.

  7. Reid Sprague - March 8, 2006

    There are costs over and above fuel and maintenance. I have not read the CU article, but have wondered what the repair bills will be on a high-mileage old hybrid. How many miles go by before that expense point arrives? I would buy an Echo with 100,000 miles on the odometer, but might be a little afraid of a Prius. That factor alone might depress resale value.
    Of course there are multiple reasons to do a thing. Wanting to reduce emissions or encourage better technology might be good ones. I have read, though, that even if someone could build a car that produced zero emissions and everyone bought one, the environmental impact of the automobile would still be unnacceptable.
    The environmental impact of the automobile is a structural problem, not a personal one. I have never met anyone who felt strongly enough about the problem to do the ONLY thing that would completely remove their own personal negative impact — that is, give up owning and driving cars totally. And if they did, the environmental problem would still exist. The person who took that step would reap only personal satisfaction. Which is the same benefit that hybrid owners get — and they get to drive! So, I guess, why not drive a hybrid? At least you can feel good.

  8. Chase Waits - March 8, 2006

    I bought my Prius just under one year ago, and consistently get 51-54 MPG, averaged over all driving/weather conditions in Ohio.
    There are hundreds of examples of high-mileage hybrids in service right now – take for example the many cab companies that have been proactive and have replaced their gas-guzzling fleets with hybrids. Even being retired after 180-200,000 miles, the maintenence costs were the same or lower than a conventional vehicle. Is there some risk? I guess so, but my car has only depriciated $800 since I bought it last May, and has over 25,000 miles on it already. Who can say that their conventional car held that much value?
    The bottom line is that everyone now has a choice. You can choose to buy a hybrid and do something to SLOW global warming, or you can go on and on about how it’s not fiscally feasible. Who buys a new car because it makes sense? All new cars lose value and eventually their parts wear out, but the fact of the matter is that the Prius still has much lower operating costs than a conventional vehicle of similar size and stature.

  9. Marty - March 9, 2006

    A response to the comment on the haves vs the have-nots — It takes one heck of a lot of carbon emissions to manufacture a new car, and people at the poverty level have a particular strength in their ability to coax a few more years of use out of them before they land in the scrap heap. High mileage isn’t the only way to reduce greenhouse emissions.

  10. Toni - March 13, 2006

    Glad to hear some folks, above, are getting better mileage than promised, cuz the mileage figures cited in the CR article are unimpressive: “The Prius and Civic Hybrid delivered an excellent 44 and 37 mpg, respectively….” Back in the early 80s, my little internal-combustion-engine Honda Civic got 50+mpg, while friends owned a Toyota Starlet that got 55mpg on the highway. As Terry asks above, have we really come that far in saving gas? Auto reviewers now routinely treat 40+mpg figures as if they were the pinnacle. I realize effluent issues also must be weighed with respect to hybrids, but let’s not pretend mileages in the 30s-40s are in any way progressive.

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