Hybrid Values and Payback Periods

Hybrid Values and Payback Periods

In May, 2005, Edmunds.com did an analysis for USA Today, and concluded the cost for advanced hybrid technology isn't "completely offset by gas savings and federal tax credits over the five years that owners typically keep their vehicles." The story proclaims, with dramatic flair, that hybrid owners would have to drive tens of thousands of extra miles a year, or gasoline would have to hit $5.60 a gallon before reaching the break-even point with a comparable gas-powered model. Their study reportedly considered purchase price, taxes, financing, insurance and maintenance over five years.

Is a Prius-driving L.A. cabal plotting a hybrid conspiracy? Or have economic realities tilted in favor of hybrids?

The Vast Left-Wing Hybrid Conspiracy

The Edmund.com-USA Today analysis is only the most sober and rational of criticisms of the hybrid purchase. As we’ve discussed on this site, there is plenty of anti-hybrid invective to go around. According to the detractors, satisfied hybrid drivers are "stupid enviro-weenies." Dan Neil, the Pulitzer Prize-winning journalist of the Los Angeles Times, found numerous examples of writers and pundits dismissing the technology as "an emotional sop for liberals, pure tree-hugging feel-goodism for the 'Save the Whale' and 'Free Tibet' folks."

Neil’s analysis goes further. He wrote, "Energizing all of these objections is a larger, darker, suspicion that hybrids represent some sort of fraud—'magical thinking,' one calls it—and the insufficiently critical mainstream journalist are complicit." Sally Pipes, president of the Pacific Research Institute, calls hybrid cars "a ruse for environmentalists and eco-fascists." Is a hybrid conspiracy being plotted? Does the hybrid-pushing cabal of the L.A. Times, the Prius-driving Hollywood elite, and perhaps others gather in a dark and hidden lair in Los Angeles—not coincidentally the U.S. corporate headquarters for Toyota and Honda. Or maybe economic realities have simply tilted in favor of hybrids?

Gas Prices and Enhanced Tax Credits

The calculus of hybrid payback periods shifted in Aug. 2005, when gas prices shot past three bucks and President Bush signed enhanced tax incentives into law as part of the Energy Act (which went into effect on Jan. 1, 2006.) As Neil indicated, perhaps hybrids didn’t pay for themselves two years ago when gas was $2 per gallon, but "it’s a much closer call now that gas is roughly $3 per gallon."

When you add the new tax credit—which for a 2006 Honda Civic Hybrid will put about $2,100 back in your pocket—you will come out "about $1,200 ahead" over a five year-period by choosing the Civic Hybrid over the conventional model, according to Neil.

Costs and Value Overlooked

Calculating relative maintenance costs is tricky. The regenerative braking system should actually reduce wear and tear and reduce costs. In an L.A. Times story (not authored by Neil) about the maintenance costs for a Prius, Auto technician Gus Heredia of Anaheim, Calif., said "We get an average of about 100 cars a day through the service department." He added, "Maybe three or four are Priuses, and they're usually just in for an oil change. I'd go broke if the Prius was all I worked on."

The obvious flaw with most hybrid cost assessments is the limitation to five years, not the lifetime of the vehicle. You might wonder what good it does you to have value wrapped up in the car, if you decide to sell at the five-year mark. The answer: resale value.

The May 23 issue of Automotive News carried a story entitled "Used Prius Costs Same As New One." Using data from Toyota’s reports on certified-used Priuses, we learn the following:

  • The base price of the 2005 Prius is $21,440, including shipping.
  • Kelly Blue Book data shows that a used 2004 Prius typically sells, at wholesale, at or above the original base sticker price of $21,510.
  • Dealers add $1,000 to $3,000 to the price of used Priuses at retail. (Sell a Prius for yourself, and you can get as much as $25,000.)
  • Used Priuses usually stay on a used car lot for just a day or two.
  • Toyota expects U.S. sales of certified-used Priuses to nearly double this year, compared with 2004.

Most people say, "You lose a couple thousand dollars as you soon as you drive off the lot." Hybrids may be an exception to this rule.

Dan Neil, auto writer for the Los Angeles Times: "What people are learning is that private choices have public consequences. Sure, I'll make money back [on a hybrid], but the more important thing is the 643 gallons of liquid crack I will save."

The Cost of 643 Gallons of Liquid Crack

Some hybrid advocates think the "you’ll never recoup your extra investment" argument is entirely beside the point. Steve Lancaster of Atmore, Ala., explained, "There is no such thing as recouping cost for a car. All cars are horrible investments, so the concept of recouping cost is irrelevant." He looks at a $60,000 Corvette driven by a frat boy—a mid-lifer in crisis would also work—and wonders if the frat boy’s feeling of coolness and social superiority ever exceed the cost his father put into the car. He added, "The guy who buys a stick shift to save $2000 at purchase, does he break even on gas mileage and resale? I know this answer is no.”

Lancaster’s views on car economics, or any calculation which yields a reasonable payback period for hybrids, is unlikely to put a stop to the steady stream of articles that try to convince car shoppers that hybrids are a waste of money. Anti-hybrid car executives are also not likely to be dissuaded. Detroit understands that cars are an emotional purchase when it comes to size and speed, but somehow can’t understand the emotional appeal of a hybrid. Dan Neil advises us to put away our calculators, "because the point is not whether I, or you will recoup penny-for-penny the hybrid investment, since the compensations are not exclusively monetary."

Ultimately, the litmus test is whether or not hybrids are selling in greater numbers to satisfied customers—on its path to economies of scale and significant reductions in the hybrid premium. There’s little doubt on that question. Neil hit the nail on the head: "The reason hybrid cars are flying off dealers' lots is not because they make such a galvanizing financial brief. It's because people of goodwill, conservative and liberal, are growing weary of the moral calculus of gasoline. What people are learning is that private choices have public consequences. Sure, I'll make my money back, but the more important thing is the 643 gallons of liquid crack I will save. Now that's conservative."

Contact Now