Tuesday, September 27, 2005

Saving gas

With gas prices well above $2/gallon, many people are understandably looking at ways to use less gas. One result is that hybrid cars such as the Toyota Prius are now selling at well above MSRP. I had to wonder if buying a Prius is cost effective.

Let's compare the cost of buying and operating a Prius to the cost of Toyota's other economy car, the Echo. According to Edmunds, the current selling price for a typically equipped Prius is $24,650, or about $5k over invoice. The EPA says that they get 51 miles per gallon in the city and 60 on the highway. Real results are not quite so good in most cases, but we'll use the EPA numbers to be generous. The Toyota Echo, without the pricy hybrid technology, is much cheaper, selling for $13,861 with typical equipment. The EPA says it gets 33 miles per gallon in the city and 39 on the highway. For our comparision, we will assume a mix of city and highway driving, giving the Prius 55 mpg and the Echo 36 mpg. A very heavy driver who puts twenty-five thousand miles on the car each year will use 454 gallons of gas in the Prius or 694 gallons in the Echo. To be generous, let's say that gas is selling for $3/gallon. The 240 gallons saved by the Prius is worth $721. Edmunds shows that the Echo costs $87 more to insure each year than the Prius, and the Prius costs $258 more to maintain and repair than the Echo.

The important question is: how long does it take the Prius owner to recoup his greater initial expenditure through the better gas mileage? The time value of money is an important consideration. If the Echo driver kept the $11,437 that he didn't spend on the Prius in the bank earning a measly 3% and used it instead to pay for the higher yearly cost of gasoline, how long would it last?

According to my analysis, it would take 32 years for the Prius to become cost effective for someone who drives 25 thousand miles a year. By this time, the car would have 800,000 miles on it. Realistically, it will never last half that long. For an average driver who drives 15 thousand miles a year, it will never be cost effective. The interest cost is greater than the gas savings, and he can never catch up. So how much do you have to drive to make it worthwhile in a reasonable time frame of 5 years? To just break even, the answer is 90,157 miles per year, or more than four hours a day at highway speed. Regardless of how much you drive, most cars will never last enough miles for the Prius to be cost-effective.

One might argue that the Echo is a step down from the Prius in comfort. To make it fair, let's compare the Prius against a car which is a step up from the Prius, a Camry LE. I used the actual price that I paid for my Camry in July, along with the EPA gas mileage figures and Edmunds cost to own. If I drove 25,000 miles a year, which I don't, it would take me 11 years to recoup the extra cost of the Prius. At a more realistic 14,000 miles per year, the Prius never catches up.

With the price of gas on the increase, perhaps the higher future price would make the Prius more cost effective. How high does the price of gas need to rise before a Prius become cost-effective in a reasonable amount of time? The price of a gallon of gas would have to be $9.21 to justify the extra cost of a Prius in eight years.

There is a price at which buying a Prius makes sense. To estimate how much the price would have to come down to reach that point, I looked for the sale price of a Prius at which an average driver who drives 15,000 each year would break even after 8 years, compared to a Toyota Camry selling for $18,000. That break even point is $20,240. The current sale price of the Prius would have to come down by $4,400 before it would be more economical than a Camry over an 8-year lifetime.

So why are people lined up to buy their Prius at a price well above MSRP? Economically it makes no sense. It is a feel-good thing. They are buying the warm fuzzy feeling they get from the illusion that they are helping the environment. The reality is that buying a Prius is one of the most expensive ways to reduce emissions.

1 comment:

David H said...

Very good points that aren't making many headlines, but I think the story for hybrids actually gets worse. I'm referring to the hybrid NiMH battery. Without labor, a Toyota dealer just quoted me $3700.00 to replace this battery. In their defense, Toyota does provide an 8yr 100k mi warranty on the battery, but what about resale value; would you buy a used Prius not knowing how much battery life is left? (not me!)
Also, for those Prius-buyers who think they're being more enviro-friendly, keep in mind that in about 5 years there will begin to be a glut of large NiMH batteries dumped into landfills (the jury is still out on how much of these batteries can be recycled).