Are Hybrid Cars the Answer?

by Dan Schafer

If you had a choice between a car that averaged 55 miles to a gallon (mpg) of fuel or a similarly performing model that averaged 28 mpg, would it be a difficult choice? You are right to ask, "What about the price?" This is where, in purely economic terms, one must get out the calculator, because that 55 doesn't come without a premium on the price. Perhaps some of us wouldn't spend long on the calculator, because if it looked to coming out close in eventual cost, the satisfaction of consuming less of our natural resources would make our decision a foregone conclusion. But some of the rest of us are concerned enough about saving to put the kids through college or working down the mortgage on our home, that we want to be certain that our decision makes economic sense.

Economy at a Price

First, what is it that makes the 55 mpg (if U.S. gallons, about 23 kilometres per litre, kpl—but we are using this figure only as a potential scenario) model more expensive? There are many technologies that have potential to increase the efficiency of automobiles. One approach that would seem simple, in terms of understanding its effectiveness, would be to use lighter materials to make the vehicle. But for reasons known to the manufacturers—probably related to costs and the market—there is not much available in this sort of vehicle. However an even more revolutionary approach is already on the market. Its revolutionary aspect is that it uses two separate sources of locomotion to power the vehicle. These vehicles have come to be known as hybrid cars, hybrid trucks, hybrid SUVs or whatever other category there may be. As we can imagine, two power systems can hardly avoid coming out more costly than single engine equivalents, especially if one of the systems is essentially the same as that of the single engine vehicle.

Electric Motors are More Efficient

If President Bush is talking about hybrids, their existence is hardly breaking news. But a little explanation is in order. Their raison d'être arises from the commonly known fact that the internal combustion engine comes off very poorly in comparison with electric motors in terms of efficiency. But petroleum fuels are so much more portable than electricity that electric motors cannot compete with internal combustion engines in the realm of powering road-going (as opposed to fixed rail) vehicles. Of course, all-electric vehicles do exist, but the business of recharging batteries, limited range, and heavy weight of the batteries has kept most of them from being very marketable to the general public. But a hybrid vehicle aims to get the best of both worlds. Its full tank of fuel means range is no more limited than a conventional vehicle. Theoretically, in fact the range is greater--less stops at the pump -- by virtue of going more distance per gallon or litre of fuel.

What Makes Them Tick?

The efficiency of the hybrid comes in several ways. For one, in stop and start driving where an internal combustion engine is most inefficient, that engine can be shut right down and the electric motor provide the power. It, of course, only uses energy when it is actually moving the vehicle. A second reason is that driving on a highway, the conventional vehicle's internal combustion engine normally has more power than it needs, because the manufacturer has had to provide reserve for acceleration and hill climbing. Consequently it is consuming more energy than is needed for the job because the engine is rarely running at peak efficiency. The hybrid can get by with a smaller internal combustion engine because the electric motor can kick in to give a boost to power when needed. That means the internal combustion half of a hybrid vehicle is more often running at peak efficiency than its single engine counterpart. Thirdly -- and this has great appeal to those of us who don't like waste -- in a hybrid vehicle, slowing down can actually be a source of energy that is captured to recharge the batteries. In a conventional vehicle this energy is lost as heat from the brakes.

Whose Calculator do you Believe?

Whether or not one actually saves money by buying a hybrid car depends on whose calculator you use. Mother Earth News in an article in November 2005 ("Pay Less at the Gas Pump: The Hybrid Revolution") did their calculation and came out saving money. Being U.S. based they compared the average fuel mileage of American passenger vehicles of 21 mpg (9 kilometres per litre) with 46 mpg (20 kpl) -- the average fuel economy of the main five hybrid models on sale in the U.S.. Using U.S. gasoline prices of $2.20 per gallon increasing by $0.10 per year, and annual driving of 15,000 miles (24,000 km), 45% highway and 55% city, they calculated a five year savings of $4,658 per year in fuel cost. By their comparison the premium for purchasing a hybrid over a comparable single engine vehicle ranges from $1,000 to $10,000. But that fuel cost savings goes up to $5,298 if one uses the average fuel economy of the two most efficient hybrids of 55 mpg (24 kpl). Since one of those, by their comparison, costs only $1,000 more than another similarly equipped vehicle with a standard gasoline engine made by the same manufacturer we seem to have a no-brainer conclusion. However we should introduce a caveat here. A fairer comparison than the U.S. average would be to use the fuel economy of that $1,000 cheaper model, 28 mpg (12 kpl), but even at that we come out with a $3,000+ saving in fuel costs over five years.

But What Does it Cost to Own?

Before we get into more calculator work we should introduce some naysayers who insist we must calculate the true cost of owning the vehicles before we can really conclude which is economical. They remind us that our money costs money. That is, if we pay for our car over five years, the more we spend, the more interest there will be on our investment. Besides that the value of our car is going to depreciate over those five years. If the percentage is equal for both cars, the higher priced one is going to lose more value to depreciation than the cheaper one. Additionally both vehicles will cost for maintenance and insurance as well. We can't really argue with the logic of such reasoning, because we want to know, at the end of the day, are we richer or poorer for our decision.

Putting the figures in a spreadsheet we can play with the data and see whether there will be anything left of our $3,000 in fuel savings. For simplicity sake we are using US data for car prices, interest and depreciation rates. We have converted the data to graph form to give us an idea of where we may be winning and where we can see we are not. Since we do not all drive the same distances nor are we all faced with the same fuel cost structures, we have tried to include some variations on that, with the reminder that varying distances introduce less predictable rates of depreciation as well as cost of maintenance.

In our cost-to-own variables we have included depreciation but excluded maintenance. This was primarily because, anecdotally, it appears consumers with experience of hybrid cars seem not to consider maintenance costs more of an issue than for normal cars. The classic quote is the Toyota mechanic who said, "I'd go broke if the Prius was all I worked on." Nor have we included insurance because the rates seem less of a function of the price of the car than other factors. Our aim was to isolate those factors that directly influenced the cost-to-own in relation to a higher initial price.

In summary we can see that if we pay an extra US$1,000 to buy our hybrid, and we drive about 15,000 miles per year, that extra $1,000 will cost us an extra $760 in cost-to-own. (Remember that real cost-to-own is an almost unbelievable multiple of this. We are only dealing with the comparison.) Then if we are buying fuel in the U.S. at the low estimate of $2.20 per gallon as our original "Mother Earth" example, our fuel savings of $3,270 over five years (see Fuel Savings chart), will get cut back to the tune of $760, leaving us a nice $2500 savings over five years. Of course our savings get sweeter as the cost of fuel goes up and in general are also better as the distance we drive increases. (Speaking of sweetness, the U.S. government in an uncommon demonstration of energy-aware largesse is offering tax rebates that can amount to several thousand dollars for purchasing a hybrid vehicle. So perhaps some of what the U.S. driver misses in hybrid advantage could be made up here.)

We have prepared another chart based on the two graphs above to cut off in round figures, unsweetened by any government largesse, what is the most any particular driver could afford to pay extra to buy a hybrid and still get a fuel saving that left him or her better off. Bear in mind that all these figures presume a fuel economy of 55 mpg (24 kph) for a hybrid as compared to a comparable normal vehicle that gets 28 mpg (12 kph).

Affordable Premium to Pay for Hybrid (US $)

Miles/Km per year

Driver

15,000/ 24,000

20,000/ 32,000

30,000/ 48,000

US Driver paying $2.20/gal

$4,000

$4,000

$6,000

US Driver paying $3.00/gal

$5,000

$6,000

$8,000

Euro Area Driver

$9,000

$10,000

$12,000

UK Driver

$10,000

$11,000

$12,000

Some Objections

In reply to "Do all the experts agree with this data?" By no means. There are negative views about whether hybrids can really obtain the fuel economy projected for them. The answer to that is that in the hands of a driver who has learned to drive in a way that makes use of the hybrid's potential the economy is much closer to the projected than for drivers who still drive the same as they always did. There are also negative statistics about hybrids' depreciation. However, it is a bit of a contradiction, on the one hand to admit that hybrids are about the only sort of vehicle for which manufacturers cannot keep up with the demand, and on the other hand blindly read the statistics of old hybrids' resale value and deduce a high rate of depreciation for present models. The fact that the technology is very new certainly has inclined those who are excited about it to want to get the very latest technology rather than settle for some of the early, outdated technology. However it is the view of this article that as the technology matures so that there is less essential difference between the latest and the five-year-old technology, the price of used hybrids will begin to reflect the actual consumer demand for them.

Are Hybrids the Only Answer?

This article is meant as an introduction to the viability of hybrids, not only as a way to use more carefully the natural resources which have been given to us, but also as a potential way to sacrifice a little more today for the sake of our finances going further tomorrow. The data is necessarily abbreviated, and based on estimates that are very variable. So, on the one hand, we would not advise making a purchasing decision based only on these results. On the other hand we believe our data points dependably in a viable direction. However hybrids are just one sort of vehicle that make better sense in both these respects of fuel saving and actual economy. We will try to look at others next time.

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