Reader Question: Hybrid Amortization?

Here’s the latest reader question, along with my reply!

Gregg asks: Hi Eric, I’m new to your site;I heard you on Tom Woods pod cast and love it! You covered EV amortization. Have you ever featured a hybrid amortization article?

My reply: I haven’t done an article on the subject, but here are my thoughts.

Hybrids – at least, hybrids like the Prius and (more recently, the Hyundai Ioniq and Kia Niro) – are priced about 10-20 percent higher than otherwise-comparable gas-engined  cars in their class. They also generally average about 10-15 MPG better than these cars. It will definitely take a few years to make up the difference at current gas prices, but it is probably doable. And for some people – depending on the type of driving they do – it can be more doable. For example, people who mostly drive in urban/city traffic – for which the hybrid drivetrain is optimized – can work off the higher up-front price in gas savings much more quickly.

But, do the math before you buy. Calculate what you’d spend to fuel a non-hybrid equivalent each year and compare that with what you’d save on fuel each year by driving a hybrid; then factor that over the number of years you plan to keep the car. If the sum saved by driving the hybrid is more than the extra you paid to buy the hybrid, you saved money buying the hybrid.

Depreciation should also be taken into account – as well as the possibility that gas prices could go up. This is speculative, of course – a gamble, either way. If gas prices remain low, it will be take longer to amortize the hybrid’s higher up-front costs; but if gas prices were to rise to $4 a gallon or more… then the math becomes much more hybrid favorable.

Electrics, on the other hand, are just too expensive up front to ever make economic sense. This is why almost all EVs on the market – and especially Teslas – emphasize speed and style and “high tech.” They are high-performance luxury cars that happen to be electric.

But the key thing as regards the amortization issue, in my opinion, is that hybrids – unlike full electric cars – have an inherently longer useful lifespan.

This is has to do with their battery packs.

Both have them, of course, but the hybrid’s battery pack isn’t generally subjected to the same discharge/charge cycling that an EV’s battery pack is subjected to. Because the hybrid can – and does – fall back on its gas engine both to propel the car and to maintain the battery pack’s charge at a certain level. EVs depend entirely on their battery pack for power. Unless the owner self-restricts his driving to a much shorter range than advertised – to avoid deeply discharging the battery – the battery will be subjected to more extreme discharge/recharge cycling – which (and this is chemistry, can’t be helped) will over time reduce its ability hold a charge and thus its useful life.

And then you get a vicious feedback loop: The battery holds less charge, so the EV can’t go as far… so it has to be recharged more often… which further strains its capacity to hold a charge.

At this point, the EV needs a new battery. And EV batteries cost several times as much to replace as a hybrid’s batteries (which may never need to be replaced during the vehicle’s useful life – before some other major component gives out – because the hybrid’s batteries have to work less hard).

The replacement cost of an EV’s battery pack is so high that it will mean either junking the car (which is useless with a dead battery) or having to spend an exorbitant amount of money on a car you already spent an exorbitant sum of money on, but which is no longer worth very much due to age and depreciation. Would you spend $10,000 on a new battery for a ten-year-old Tesla with a retail value of $15,000?

Another thing about hybrids is that – unlike EVs – they are still functional even if the battery pack has lost efficiency; the gas engine keeps the car going. The car won’t deliver the same MPGs it did when the battery was at full capacity, of course. But you’ll still have a functional car – as opposed to a 5,000 pound brick in your driveway.

. . .

Got a question about cars – or anything else? Click on the “ask Eric” link and send ’em in!

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