Published January 13, 2015
Three bucks a gallon for gasoline is back for the summer, and maybe for good. And it might go to $4 in a lot more than the few places it already has. The global warming crisis seems to be closing in inch by inch. The headlines — and the gas bills — have you thinking about a hybrid automobile.
Should you follow the impulse?
First, let's make one thing clear — if you don't need a new car, you probably shouldn't buy a hybrid just for the fuel savings. But if you do need a car, it's time to take the 15 minute test. And it's not a bad idea to review anyway — you never know when you suddenly might need a new car.
Price vs. operating cost
Aside from doing what's right for the environment, the economic tradeoff is key.
Hybrid vehicles cost about 20 percent more than their conventional counterparts. That premium starts at about $4,000 for a small $20,000 sedan and ranges to about $10,000 for a Lexus SUV.
That cost is offset by federal and state tax credits, which run anywhere from $250 to several thousand per vehicle, depending on the vehicle and the state.
And what about savings? The biggest, of course, is gasoline. You can expect fuel economy to rise at least 50 percent.
And there are smaller savings along the way. Some insurance companies give 5 percent to 10 percent discounts to hybrid owners. Longer warranties may reduce service costs and since hybrids convert energy into electricity when slowing down, brake life is longer.
Making the numbers work
So you can figure on a higher price offset by a credit and lower costs. But do the numbers work? It depends on the situation:
Choice of hybrid
Congress set tax credits based on fuel savings compared with equivalent conventional vehicles — so savings are far greater on some models than others. Credits range from $250 to $3,150 per vehicle purchased new. However, the $3,150 was for the Toyota Prius model. Rules stipulate that once manufacturer sales topped 60,000 the credit decreases. In fact Toyota has reached the limit, and the Prius credit has dropped twice to $787.50 today. That puts the $27,000 Ford Escape Hybrid 2WD at the top of the credit list at $2,600, dropping the cost premium to around $3,000.
How much you drive
Now we get to gas savings. If you drive 15,000 miles per year, that's about 500 gallons of gas for the hybrid (30 mpg) and 750 gallons for the conventional version (20mpg). At $3 a gallon, that's $750 a year. If you drive 25,000 miles per year, you save 416 gallons, or $1,250 per year. At $4 per gallon, that savings would swell to nearly $1,700 per year. So the payback period varies considerably — in the high-mileage, worst-case gas-price scenario, the Ford hybrid would "pay back" in less than two years ($3,000/$1,700).
Which state you live in
Some states have offered generous credits in addition to the federal credit. Colorado tops the list with credits up to $4,713, and New Mexico waives sales and excise taxes on the vehicle purchase. You'll have to do some research.
Your tax situation
Credits are great, but don't work for everyone. The hybrid credit is "nonrefundable," meaning there's no refund if your tax liability drops below zero. And if you're in "AMT land," the credit doesn't offset the alternative minimum tax. So the credit works best for those with midrange income and deductions. If you're in a high-tax coastal state you're more likely to fall into AMT, so you may not benefit.
Bottom line: from a numbers point of view, hybrids don't work for everyone, but may work for you. If you recover the price premium in four years or less, the hybrid solution probably makes sense.
Copyright (c) 2007 MarketWatch, Inc.