1/26/2008

The Cost of Owning Hybrids

I was reading about the Toyota Highlander Hybrids. The identical hybrid version of the Highlander apparently costs $5,100 more. On the highway, the hybrid gets 27 mpg versus 24 mpg for the regular version -- a 12.5 percent improvement. For city driving, it looks as if the improvement is much larger 18 to 25 mpg -- a 38 percent improvement. Assume an average improvement of 25 percent. A couple of simple calculations indicate that this is unlikely to be a wise investment for most people. First some assumptions:

1) Own the car for 10 years
2) Put 150,000 miles on the car
3) 22 mpg average
4) $3.00 per gallon in current dollars
5) 3 percent real interest

Over the lifetime of the car you would buy 6,818 gallons. The present value of those purchases in today's dollars over those 10 years are as follows:

Year 1 $496.46
Year 2 $482.01
Year 3 $467.97
Year 4 $454.34
Year 5 $441.11
Year 6 $428.26
Year 7 $415.79
Year 8 $403.68
Year 9 $391.92
Year 10 $380.50

$4,362.04 versus a payment today of $5,100. You are about $738 poorer for buying the hybrid. The day that you buy the hybrid you might as well throw out $738.

There is one caveat regarding resale value for the car and how much being a hybrid would increase its value. I looked up the 1997 Toyota Tacoma Xtra Cab's trade-in value (the Highlander only started in 2001). If the truck is in good condition, the value would be $2,300 (again assuming a 3 percent real interest rate that is the equivalent of $1,711). Assuming that the hybrid equipment depreciates at the same rate as the rest of the car, that would leave you with $296 from the sale.

A final net loss of $442. I don't know about you, but I wouldn't want to throw away $442.

UPDATE: An important point has been raised in the comment section. The replacement costs of the batteries in hybrids are very high. That link quotes Car and Driver saying that: ""battery replacement will cost $5,300 for the Toyota and Lexus hybrids, and the Ford Escape replacements run a whopping $7,200." These costs swamp the estimate that I have produced.

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13 Comments:

Blogger DonWorsham said...

First let me say I do care to own a hybrid. However many people who hope that the purchase will "help" the environment may not mind spending (losing) less than $45 a year (over 10 years) in that endeaver.

1/26/2008 10:22 AM  
Blogger Richard said...

There are other hidden costs with hybrids, the main one I can think of is battery replacement cost which can run into the thousands. There are people who have had defective batterys or a defective cell where the cost of replacement has been literally $8000! the current crop of hybrids use lithium-ion cells which can also develop a "memory" which can hamper the performance of the vehicle by reducing the usable capacity of the battery although this memory effect has be reduced by the engineers who designed the batery management software/circuitry. With this new technology there is also the problem of a lack of familiarity where people have paid for a battery to be replaced when all that was required was a repair to the battery terminals. http://www.hybridcars.com/technology-stories/battery-replacement-costs.html

1/26/2008 11:21 AM  
Anonymous Anonymous said...

John,

(Sorry if I am overly familiar.)

First, you said: "A final net loss of $442. I don't know about you, but I wouldn't want to throw away $442." Come on now, isn't that a small price to pay to save the planet?

Now that I have the sarcasm at AGW out of my system, I'll get to my real point. There is considerable discussion back and forth about whether e.g. the Prius doesn't pollute more than a Humvee IFF you take their entire lifespans into account - including the manufacturing process.

http://www.evworld.com/news.cfm?newsid=14582

Considering some of the things being proposed (radio-controlled thermostats, carbon tax) I wouldn't look askance at this assertion.

Your comments?

Peter in Western Mass.

P.S Is "AGW" anthropogenic global warming or is it Al Gore Warming?

1/26/2008 12:36 PM  
Anonymous Anonymous said...

You have hit exactly why Detroit engineers said NO! to hybrids while California engineers in Japanese companies said YES!.

It's not about the numbers, its about religion and feeling good about your self for support the religion of green.

Even if its all false.

1/26/2008 3:05 PM  
Anonymous Anonymous said...

So far, hybrids seem to depreciate faster than conventionally powered autos. That's another wrinkle to consider.

-Justin

1/26/2008 4:08 PM  
Blogger John Lott said...

Thanks for the comments.

Dear Don Worsham:

The problem is that it won't help the environment. I put little credence in the claims about global warming. If you would like to see my views on global warming, please see this. I also don't think that it will help with the price of gasoline. Consumption of gas by cars in the US is such a small portion of gas use in the world that it is hard to see it having much of an impact.

Dear Richard:

I agree that I forgot to include this cost, and it is a huge cost. If you don't mind, I will add this in the original post.

Dear 1st Anonymous:

The pollution produced by the production process is obviously something else to include. I don't know enough about that to comment right now, but I appreciate you raising the point.

Dear 3rd Anonymous:

Thanks, I didn't know about this. Thank you.

1/26/2008 11:22 PM  
Anonymous ronhard said...

You left out the tax credit. you left out the fewer barrels of oil we are importing. You left out the less money we will spend when gasoline is ten bucks a gallon. you left out the pleasure of sitting at a red light with the gas engine off - the nice silence. I have two Preii.

1/27/2008 2:56 PM  
Blogger John Lott said...

Dear Ron Hard:

As I noted in my response to other comments: "I also don't think that it will help with the price of gasoline. Consumption of gas by cars in the US is such a small portion of gas use in the world that it is hard to see it having much of an impact." The tax credit also ended in 2006. As to the pleasure of sitting at a red light with the engine off, if you are willing to pay many thousands of extra dollars when the cost of replacing the batteries are included for that, that is your choice. Just so long as you realize that this emotional benefit is pretty much the only benefit that you get.

1/28/2008 2:56 AM  
Anonymous Anonymous said...

How does your analysis change if a gallon of gas costs $10? Here's why I ask:

Oil Officials See Limit Looming on Production
http://online.wsj.com/article/SB119543677899797558.html?apl=y&r=562286

A growing number of oil-industry chieftains are endorsing an idea long deemed fringe: The world is approaching a practical limit to the number of barrels of crude oil that can be pumped every day.

Some predict that, despite the world's fast-growing thirst for oil, producers could hit that ceiling as soon as 2012. This rough limit -- which two senior industry officials recently pegged at about 100 million barrels a day -- is well short of global demand projections over the next few decades. Current production is about 85 million barrels a day.

1/28/2008 3:41 PM  
Blogger Xrlq said...

John, I think you missed part of Ronhard's point about $10 gas. I don't read his comment to suggest that driving hybrids will stop gas from costing $10 a gallon, so much as merely noting that the price could end up there anyway, and if it does, the same amount of per-gallon savings contemplated by your model will translate into a lot more than $5,100. So maybe the real question is, how likely is price to get that high, and how much $$$ are you willing to bet upfront on what everyone can only hope is a losing bet?

One problem I do see with your model, though, is that it assumes everyone has average driving habits, with the average mix of urban vs. rural driving (cf. the economist who drowned in a lake whose average depth was only one inch). My sense is that most people who seriously consider hybrids are guilt-ridden, tree-hugging liberals, who in turn tend to live in large cities. For those who drive in stop and go traffic every day and rarely see the countryside, a hybrid might actually make sense.

1/29/2008 9:05 AM  
Blogger John Lott said...

Dear Ron Hard:

Xrlq is right that I misread your note, sorry. Sure there is some price at which hybrids would pay for themselves. I would have to figure out what that price would be before it paid for itself, though with battery replacement costs $5,300 it would have to be substantial. I will see if I have time to figure it out. The bottom line is that if people thought that the price of gas was going to $10 per gallon, it would be there now. If you thought that gas was going to be that expensive, you would buy gas today and store it to sell at the higher price. Companies and people would keep doing that until the current price was equal to the future expected price minus the cost of storage. Given the current price, my best guess is that the price isn't expected to be anywhere near $10 per gallon.

Dear Xrlq:

I picked a saving between city and highway driving. With the battery replacement costs it is hard to see how even purely city driving would come anywhere near to paying for the costs of the hybrid.

Thanks.

1/29/2008 11:45 AM  
Anonymous danielnd said...

I was interested, so I tried to run the numbers. I may not have gotten John's calcs completely the same, but without a full description, that would be unlikely -the calc can be seen here.

I also did a sensitivity analysis on gas price and years owned, it doesn’t address $10 gas (savings $9,721.66 for $10 gas, 10 years), but it does show that the savings or loss is very dependant on the time value of money and the price of gas assumptions. You can see the sensitivity analysis by clicking here.

I think everyone is missing the big picture however, especially those who are discussing the benefits to society like “reduced gas usage”, “reduced dependence on foreign oil”, “better for the environment”, etc. These numbers include only part of the cost of offering Hybrids. CAFE standards and other government regulation effectively force those who drive non-hybrids to subsidize hybrids. Any transfer payment (like taxes) is likely at best a wash (as the society is both giving and receiving the payment with some waste). In order to be an efficient use of resources, the total cost of hybrids should be lower than the available alternatives, e.g. converting all locomotives to electric & building more power plants or making all trucks into hybrids for the same or equivalent benefits - for the "other benefits" argument to win the day.

Calc Notes:
I should note that in order to match Dr. Lott’s calculations as closely as possible, I read his assumption of 25% improvement to be 25% less gas, which implies a 29.33 MPG, which is higher than the upper bound of 27. Also, since these use EPA numbers which are based not on direct observance of fuel used, but instead on exhaust measurements, there appears to be a bias toward the hybrid. Hybrid battery replacement shouldn’t happen in the first $160,000 but the fact that it has may indicate higher maintenance costs which are not included. Tax breaks are not included as it is my understanding they are no longer applicable to Toyota vehicles.

1/30/2008 1:25 AM  
Blogger Samuel said...

We are all think like hybrid are the greener technology cars but fact is that Present Electric car technology is at very beginning stage, it's need lot of innovations before it's became greener technology, and they even need to find out the way to build a greener battery before greener car, even our electricity production and distribution systems also need to became greener. if this will happened we can compare an average cost of hybrid vs normal car, but as far as today hybrid cars can cause more pollution than normal car does.

Joshuas Law

9/24/2010 6:00 AM  

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