People typically buy hybrid cars and hybrid SUVs because they care about the environment and want to save money on gas. Hybrids usually have higher prices than gas-only cars, however, making buying one a tricky financial decision. You pay more for the car up front and hope that you drive enough – and that gas prices stay high enough – for you to make that price premium back in gas savings. With cheap gas, that equation may not work out for all buyers.
With sustained low gas prices, sales of crossovers and SUVs are rising. Hybrid cars, on the other hand, were never all that popular to begin with, making up just 3 percent of total car sales at their peak in May 2014. Hybrid car owners aren’t all that loyal to the class, with Edmunds.com finding that less than half of people who traded in a hybrid so far in 2015 have replaced it with another one. In fact, 22 percent of people who traded in a hybrid this year have replaced it with a crossover or SUV.
Given the current price of gas, Patrick DeHaan, senior petroleum analyst at GasBuddy.com, says, “It doesn’t make as much financial sense to buy a hybrid today as opposed to a year ago.” Still, he notes, “the era of low gas prices may not stick around,” and overall, “it’s not the best move to purchase a vehicle based on gas prices today – or six months from now.”
That reasoning is based on the fact that the payoff period for a hybrid, which is the length of time it takes to save enough on gas to make up for the hybrid’s higher purchase price, can take many years. During that period, gas prices can fluctuate quite a bit, especially given demand for oil not only in the U.S., but in countries like China. “Today’s gains in large car and SUV sales could turn into tomorrow’s record high gas prices," DeHaan says. Those higher gas prices mean that hybrid owners would save at the pump, shortening the time it takes them to break even on a hybrid’s higher price tag.
Aside from low gas prices, there’s another factor at play when it comes to making financial sense of buying a hybrid: what people are actually paying for them. While almost every hybrid has a higher manufacturer suggested retail price (MSRP) than a comparable gas-only car, low demand for hybrids has lowered the average transaction prices for hybrid cars, even as transaction prices for the industry as a whole are rising.
Jessica Caldwell, senior analyst at Edmunds.com, says that when it comes to buying a hybrid, “you can probably get a better deal right now than in the past.” The current average transaction price for the industry as a whole is as high as it’s ever been, but Caldwell notes that transaction prices for hybrids are declining. “You see it in the incentives” car companies and dealers are offering, she explains. “Lease deals on hybrids are quite generous right now.”
Low demand is the reason for the decline. “Demand [for hybrids] is down around the country and that impacts inventory and, of course, prices,” Caldwell says.
That’s also what Eric Lyman, vice president of industry insights for TrueCar, Inc., sees. He says that, compared to last year, hybrids aren’t commanding the kind of price premium they usually do over gas-only cars. He says that compared to July 2014, the price premium commanded by hybrid cars has dropped by 7 percent.
“There’s always going to be a premium for hybrid cars because they have lower operating costs,” Lyman says. Still, with low gas prices and low demand, the price difference between hybrids and gas-only cars is shrinking. “Changes in demand from consumers means that [car companies] are adjusting their incentives and discounts to move the metal and sell the product,” he adds.
In this kind of car buying environment, with transaction prices for hybrids and gas prices trending downward, figuring out if a hybrid makes sense for you comes down to simple math. Let’s compare the Ford Fusion Hybrid to the gas-only Fusion.
The 2016 Ford Fusion S starts at $22,110 and gets an EPA-estimated 22/34 mpg city/highway. Based on gas prices of $2.77 per gallon, and a mix of city and highway driving, it costs $.10 in gas for every mile you drive in the Ford Fusion S. The 2016 Ford Fusion Hybrid S, on the other hand, starts at $25,185 and gets 44/41 mpg city/highway, according to the EPA. Every mile you drive in the Fusion Hybrid will cost you $.06.
Those numbers are based off of MSRP, however, and as TrueCar Inc.’s Lyman says, “MSRP is really the ceiling of what consumers can expect to pay” for a new car. With low demand, discounts and incentives on hybrid cars, you may be able to get a hybrid for far less than MSRP, which will start your savings earlier. When gas prices go back up, as DeHaan thinks they will, your savings will add up even faster.