What’s it worth to save some money on the purchase of gasoline for your car? Depending on where and how much you drive, hybrid vehicles promise to lower your transporation costs through reduced gasoline purchases. And as gasoline prices climb, that may be all you need to know to investigate a hybrid car for family transportation. But higher fuel prices may be driving up the price (or keeping the prices up) of the very vehicles that offer greater fuel efficiency and savings. How? Consumer demand.
As an alternative to the traditional internal combustion-powered vehicles, hybrids are a gradually increasing portion, and an increasingly diverse array of the offerings, in the American auto market. Hybrids attract potential buyers for a number of reasons—the promise of savings, type of emissions, vehicle size, and lifestyle, to name a few. Saving on fuel costs clearly spurs more interest in efficient vehicles, the higher the price of gasoline climbs.
The hybrid savings come at a premium price, however. Even with a greater inventory of vehicles coming to market, manufacturer subsidies, and (limited) consumer tax breaks, consumers pay more to purchase a gasoline/electric hybrid than than they do for a comparable gasoline fueled auto or SUV.
Even the most environmentally-motivated consumer will notice the higher prices of hybrids at the dealership. There can be a $10,000 dollar difference or more for some models. That means a longer break-even time before fuel cost savings actually begin to appear. Whether other considerations, –like potential environmental benefits–are accurately measured, or whether costs are fully measured either, are left unanswered here. This Free Market Minute doesn’t attempt to resolve the question of whose cost-benefit analysis is more complete, or whose arguments more convincing. Suffice it to say–there are numerous pros and cons associated with the gasoline/electric hybrid, and in addition, consumers are making private transportation choices in an increasingly circumscribed (read: regulated) market. What consumers eventually choose will probably be determined by a mixture of whatever is the existing public policy, by private preferences, and by related market conditions.
And now for the part about consumer demand. The rule is that an increase in the demand for any product in the market, everything else equal, tends to drive up the product’s price. That’s pretty ‘common sensible.’ In addition, if it is difficult or impossible for sellers to supply more of the product quickly, price will stay relatively high. And one last point that applies here: when consumers have few substitutes for the good, as was true in the early days of hybrids, price again tends to stay high.
Fears about ever-higher oil and gasoline prices were the spark that ignited a real demand for hybrids. As fuel prices climbed, so did the demand for relatively scarce hybrid cars. Examples of new hybrids selling above Manufacturer’s Suggested Retail Price, in the face of short-run peaks in gasoline prices, are a matter of record.
For consumers who are motivated mainly by the problem of higher fuel costs, the move to the hybrid car market seems like an obvious solution. Whether consumers realize satisfactory cost savings with hybrids, compared to traditional vehicles, though, depends on driving habits, fuel costs, and other factors.
As the price of gasoline climbs, consumers’ interest in saving money on transportation costs usually rises too. That’s not a bad thing, since conserving scarce resources means we will be motivated to find substitutes, develop new sources, and realign our budgets as needed. Consumers don’t need to be taught that when budgets are tight, we reassess our priorities and look for margins that can be adjusted.
Where on that margin does the hybrid car fit in? It probably depends on how we prefer to economize. The pricey hybrid might fit the bill perfectly, but perhaps it’s not for everyone. European countries have long dealt with the high price of fuel, with some interesting and different market responses. A topic for another FMM.