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The Economics of Hybrid Cars

When driving in northern California, it is quite hard not to spot a Prius driving alongside you. If you look a little bit harder, you will notice a hybrid logo on many other vehicles on the road. I guess Silicon Valley is just one more beneficiary of the hybrid fever that has been spreading across the nation. U.S. hybrid sales have skyrocketed 165% per year over the past decade due to increased attention to climate change, escalating gas prices, and an effort to be energy conscious. While more people are buying hybrid cars, it does not seem to as popular in other parts of the country. Maybe citizens of the Valley can afford to live their principles due to their larger-than-average pocketbooks. On the surface, it seems gasoline cars are a better deal than their hybrid counterparts, with hybrids often costing thousands of dollars more. However, deeper investigation reveals that hybrids may be cheaper in the long run than their gas-guzzling cousins.

Let’s look at some examples to see why this might be. Lets say two people, Eco-friendly Elaine and Skeptic Sam are looking to buy a car. Both of them happen to want the Toyota Highlander, which comes in both gas and hybrid models. Elaine decides to buy the hybrid variant, and Sam purchases the regular version with equivalent trim. At first glance, Sam seems to have gotten the better deal. He has paid $35,745 for his car–$2,795 dollars less than Elaine’s $38,540 purchase. In order to proceed, we must assume two things. First, that both Elaine and Sam drive 15,194 miles per year, the average between the ages of 20 and 54, and second, that each year Elaine and Sam own their car the gas price averages around $5. This is difficult to predict, but given the current trends, it is not an unlikely guess. If we divide the miles driven per year (15,194) by the average miles per gallon of the two cars (21MPG for gas and 28MPG for hybrid), we find that Sam’s car requires around 724 gallons per year, while Elaine’s uses 181 gallons less, or 543 gallons per year. If we multiply the difference in gallons used per year (181) by the average gas price ($5), we will figure out that Sam spends $905 more than Elaine per year on gas.

Fast forward five years. Both Sam and Elaine have sold their car, with Sam’s fetching $17,209 and Elaine’s fetching $17,751–$542 more than Sam, reflecting the typical premium a hybrid car commands on re-sale. This means that after Elaine sold her car, she only paid $2,253 more than Sam. Lets calculate how much Elaine has saved in gas purchases over five years. If Elaine used 181 gallons less than Sam per year, and therefore saved $905 per year, then over four years she will have saved $4,522 by having a more energy efficient car. This means she spent $2,269 or 6.3% less than Sam owning a hybrid over five years. If Elaine owned her car longer, then savings would increase. In addition, this phenomenon applies to almost every non-luxury hybrid out there, from coupes to SUVs. This set of data proves there may be significant economic benefits to driving a hybrid car, in addition to lowering emissions. So what are we waiting for?

UPDATE: 

After my original posting, the United States Department of Energy has created a new website–www.fueleconomy.gov–that has a lot of very useful information about hybrids and how much the average consumer can save–albeit quite hard to navigate. It even has an automated savings calculator that does a very similar calculation to the one explained above. Enjoy!

Sources:

http://www.fhwa.dot.gov/ohim/onh00/bar8.htm

http://www.edmunds.com/

http://kruzeniski.com/2010/hybrids-vs-trucks-comparing-sales-over-the-last-decade/

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