April 14, 2005

Hybridize

I may have written briefly in this space before about hybrid cars, but I think it needs an update due to rising fuel costs. Let's assume for a minute that you can get 15 extra miles per gallon with a hybrid over a conventional engine, and lets say that means 28 mpg for regular and 43 mpg for hybrid. Assuming that a person will drive approximately 10,000 miles per year, that adds up to roughly a difference of 125 gallons of gas. According to the government, the national average gas price for the week of April 11th is $2.28 per gallon. If we make the rash assumption that a gallon of gas would be that price for an entire year, the difference between owning a hybrid and a conventional car is 125gal * $2.28/gal = $285. Obviously, this assumes the conventional car you're driving gets pretty good milage, as 28 mpg is a number not achieved by many cars. If we drop the milage to 24mpg, the savings increase to $419 per year. The current difference between a Honda Civic and a Civic Hybrid is in the neighborhood of $3000. At savings of $419 per year, it would take a little over seven years to make up the difference. This isn't an unreasonable time, to me, as I would not buy a new car that I planned to have less than seven years. Back when gas was $1.80 per gallon, it would have taken just over nine years to make up the difference, which may be stretching the length of time most people own a car. The higher gasoline prices go, the more a hybrid makes sense. I realize that I've made a lot of assumptions that are unrealistic, such as gas price stability, miles per gallon, miles per year, and possible higher maintenance costs, but these assumptions are good enough to illustrate my point, that higher gas prices make a more compelling case for a hybrid car.

I've left something out, though it only applies this year, at least under current tax law. That thing is the tax incentive for purchasing a hybrid. If you purchase a hybrid in 2005, you can claim a $2000 deduction on your 2005 income tax return. Assuming that a hybrid owner is in the 25% tax bracket, a $2000 reduction in AGI can save you $500 in today's dollars, which is worth more than it will be in 5 years, due to inflation. With that $500 reduction, the seven years it would take to make up the cost in fuel savings is reduced to just under six. This tax credit is phased out in 2007, thought it may be reinstated in the future.

I've approached this topic from a purely economic perspective because I can put a number on fuel costs and gas milage. The value of the knowledge you are polluting less and consuming less can't be quantified and varies from person to person. Some people who own hybrids don't care about the cost savings, they only care about saving the environment. For the, the previous two paragraphs don't mean a whole lot. For the rest of us, consider the potential savings. It only pays to get a hybrid if you're going to keep it longer than the time it takes to make up for the price premium. If you plan on getting a hybrid, make sure you do your homework to figure out the total cost of ownership so that you're not throwing money down the drain for no reason.

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