6-8-07
So You Want to Buy a Hybrid...
Every time gasoline prices spike, I start getting questions from clients about switching to more efficient vehicles. My clients tend to be politically correct and environmentally conscious, so the questions recently are about hybrids. My clients also tend to be cheap, whether by choice, necessity or habit.
In the past, it was pretty obvious that the economics of hybrid vehicles were not on their side. Hybrids cost more—sometimes much more—than a comparable conventional vehicle, even after the federal tax credit I mentioned in my last column. When gas was about $2.50 a gallon, it had always been obvious to me that few, if any, people would drive enough to recoup that additional outlay. With fuel prices now much higher and still rising, the gap is narrowing. I decided to do the math.
But before proceeding to the math, some questions need answering.
What Are We Comparing?
In any comparison of alternatives, you must make sure that you are comparing the right alternatives, and that you are comparing the right attributes of those alternatives. This is tricky with cars.
Few car models come in both hybrid and non-hybrid versions. Of those few, I chose the Toyota Camry, mostly because it is America’s best-selling model. But which non-hybrid trim-and-engine package combination is most comparable—CE, LE, SE, XLE? Four- or six- cylinder? Based on the specifications I could find online, I picked the LE, with a four-cylinder engine and automatic. Someone more familiar with Camrys might use a different model.
There is also a case to be made that Camry-to-Camry is not the right comparison at all. Some people approach their decision by saying, “I can afford a car that costs $xx,xxx.” They might be comparing a Toyota hybrid to a non-hybrid Acura or Lexus or Volvo at more-or-less the same price. Their trade-off is not economic, but something unquantifiable: the relative prestige, luxury and driving satisfaction of these automobiles.
That does not lend itself to mathematical analysis, so I’m staying with Camry-to-Camry.
About Those Attributes
Two key attributes are the cost of the vehicles, and their fuel economy. The less accurate those data are, the less accurate our results.
For each, the only published data available are only semi-accurate: the Manufacturer’s Suggested Retail Price (MSRP, or “sticker” price) and the EPA’s gas mileage figures.
A few car models, mostly expensive European imports in high demand, generally sell at or near sticker price. Otherwise, the MSRP is only the starting point for price negotiations, which are a delicate, complex mixture of poker and psychological warfare.
For simplicity, I used the MSRP as a surrogate for average actual prices. If both the hybrid and non-hybrid sold at the exact same percentage discount from sticker, using this surrogate would have no effect on the results. Right now, I think hybrids are likely to be in higher demand and sell at a smaller discount. This would mean my calculated payback period for fuel savings is shorter than the actual one.
Gas mileage: even the EPA knows its numbers are unrealistic, and they are revising their testing methods with the 2008 model year. But that’s all we have. I used the city figures, because, first, that’s the kind of driving I mostly do and what I think my readers mostly do, and second, that is the type of driving where hybrids have the greatest advantage in fuel consumption. Using the highway figures would vastly lengthen the payback periods—almost triple in the case of the Camry.
To the Numbers
A 2007 Camry hybrid has an MSRP of $26,200; subtracting the $2,600 federal tax credit brings the cost to $23,600. A similarly-equipped Camry LE lists for $20,975.
The hybrid buyer is paying $2,625 more, or 11.12 percent. For that, he gets an EPA city figure of 38 miles per gallon instead of 24 mpg. That seems like a big difference, and, proportionately, it is.
When translated into miles, the difference is less impressive. As I write, gas stations in my neighborhood are charging $3.80 a gallon. The hybrid owner has to drive 45,000 miles just to break even. That’s several years’ driving.
How many years depends on one other assumption: miles driven per year. Cambridge Energy Research Associates, an energy consulting firm, analyzed federal data and concluded that the average car in America was driven 12,375 miles during 2005. That is roughly twice the driving I do, and considerably more than my clients usually report with their tax data. Then again, neither they nor I are doing hour-long daily commutes from distant suburbs.
Using the national average figure of 12,375 miles, the payback period for the hybrid Camry is 3.6 years. At 10,000 miles, the payback period increases to 4.5 years, and at the meager 6,000 I drive, it leaps to 7.5 years.
This translates to annual fuel cost savings of: $722 at 12,375 miles driven each year, $583 at 10,000 and a gigantic $350 at 6,000.
The economics, then, do work for some drivers. Not all, probably not most, but I was surprised to see how close the balance is.
“Your Mileage May Vary”
You know that phrase, and may even have done that voice-over. First question: will you keep the car long enough to recoup the higher cost? If not, we would have to consider the relative resale value of hybrid and conventional cars; those figures would be speculative at best.
This analysis also doesn’t take into account that the hybrid buyer is laying out money now for a savings in the future. Similarly, it effectively assumes both buyers pay cash; if financed, the hybrid buyer’s interest cost will be higher and the payback period longer. It assumes that insurance, repairs and maintenance will cost the same for a hybrid as a conventional vehicle. And there is the implicit—but highly unlikely—assumption that gas prices will not increase further.
If you want to play with these results using your own assumptions about vehicles or gas prices, a copy of my Excel spreadsheet is available for downloading here.
Are there money or tax questions you would like to see discussed in this column? Let me know, at 2835 N. Sheffield, Suite 311, Chicago, IL 60657, or call 773/525-1778 (888/525-1778 toll-free outside the Chicago area) or e-mail greg@gregmermel.com.
Greg Mermel is a certified public accountant whose clients in the arts range from individual performers to major theatre companies and suppliers. He has also been known to produce theatre.