Hybrids still make sense (even if the Wall Street Journal doesn't)

[geoffrey]

Last year, the Wall Street Journal argued that hybrid vehicles are still a money-loosing proposition. The crux of their argument was that the cost savings from gasoline is offset by expensive premiums for large battery packs and complicated transmissions. According to the WSJ, it takes 18 years to pay off the cost premium of a Prius in fuel-savings.

I'd like to check the WSJ's math. The WSJ considers the case in which a motorist drives 15,000 miles a year and pays $2.79 per gallon at the pump. They estimate the Prius gets 46 miles per gallon (mpg), as an average of city and country driving, and the alternative gets 32 mpg. The WSJ claims the cost premium of a Prius over the comparable non-hybrid (the Corolla) is $7000. Under these assumptions, the Wall Street Journal is correct that is takes 18 years to pay off the premium, or break even, on the Prius.

I'd like to run the simulation again, but with some different assumptions. First, the US consumer gets on average 25 mpg on their internal combustion engine, not 32 mpg, like the Corolla. I think the relevant comparison is not Prius v Corolla, but Prius v everything else the US buys. Second, with gas prices already above $2.79 a gallon and price per barrel over $100, I think an average of $5 a gallon over the next 15 years is a much more reasonable expectation. Lastly, let's assume the average Prius consumer is financially savvy enough to reinvest their savings. David Bach, coiner of the Latte Factor, analyzes the effects of small, recurring savings from slight modifications in consumer behavior. Eg, what happens if you brew your own coffee everyday instead of paying $5 for a latte? Bach assumes a 10% after-fee after-tax inflation-adjusted return on investment. (Bach says you can make $1 million dollars in 41 years if you switch to the home-brew). I think Bach's return on investment sounds high. Let's say the Prius consumer gets 4% compounded annually after fees, taxes, and accounting for inflation. In this case, the consumer pays off the $7000 premium in less than 5 years. Moreover, the consumer pays off the entire $22,000 cost of the Prius in just over 12 years.

Now, the Wall Street Journal has another argument for why the Prius doesn't pay off. It is that the consumer no longer receives a tax credit for purchasing a Prius. The WSJ reports that the $3000 credit offered by the US government for purchasing a Prius is being phased out because Toyota has sold so many that they no longer qualify for Government assistance. The previously-available $3000 credit represented a 14% break on the price of the car. The WSJ argues that without the price break, the car is no longer attractive.

I've already shown how tweaking the WSJ's assumptions makes the Prius more than attractive, but actually free if you keep it for over 12 years. But the WSJ has a point. That 14% price-break was nice. How else could one cut down on the cost of the Prius? Google offers a $5000 subsidy to its employees for purchasing a Prius. That means Google employees pay off the purchase price in 10 years. But we don't all work for Google.

The annual cost of a subscription to the Wall Street Journal is $215. Let's say you read the WSJ and do not own a Prius. If you decide to cancel your subscription to the WSJ, buy a Prius, and put the savings from both into the same 4% after-fee after-tax inflation-adjusted investment, within 12 years, you will not only pay off the $22,000 cost of the Prius, but will also recoup the $3000 price break from your savings on the Journal. Not to mention help the environment, which is of course, good.

So, don't be frightened by the Wall Street Journal. In fact, don't even read the Wall Street Journal. Cancel your subscription and buy a Prius. Other than being good for the environment, it is definitely not a money-loosing proposal.