High gas prices, and pollution concerns, are prompting car dealers to do something they haven't been able to do in many years -- charge premium prices for automobiles, specifically, gas-electric hybrids.
With waiting lists up to six months, auto dealers are adding thousands of dollars in premiums to these vehicles' list prices. This, at a time when selling regular cars requires thousands in rebates just to get people in the dealerships, is both blessing (high demand) and curse (supply can't keep up) for automakers like Toyota (NYSE: TM) and Honda (NYSE: HMC), the hybrid market leaders.
Basic economics helps explain the steep mark-ups. Currently, demand is significantly greater than the limited supply, therefore the price goes up. Hybrids have become so popular that spots on dealers' waiting lists can be found for sale on eBay (Nasdaq: EBAY), and some automakers have stopped running hybrid ads in the most overheated markets.
Promising to match their gas-only brethren in power and handling, hybrids are starting to come into their own. The next few years will see an explosion of new hybrid offerings. Ford (NYSE: F) has built a hybrid version of its Escape SUV, GM (NYSE: GM) will have a Chevy Silverado hybrid, and Nissan (Nasdaq: NSANY) will release a hybrid Altima in 2006.
Since gas mileage is the real differentiator for hybrids, let's do the math and see how long it would take a consumer to break even on the purchase of a hybrid. The popular Toyota Prius commands up to $5,000 over a comparable gas-only car, and advertises 60 miles per gallon. A Toyota Camry gets about 30. Assuming a $5,000 mark-up, and driving 15,000 miles per year, here's the break-even time at various gas prices:
| Gas Price |
Years to Break Even |
| $2.00 |
10 years |
| $3.00 |
6.7 years |
| $4.00 |
5 years |
| $5.00 |
4 years |
At current gas prices, high-priced hybrids don't make much sense from a cost savings point of view. The hybrid market is tiny, and once demand from early adopters is satisfied, and production increases, premiums should contract (getting back to that supply and demand stuff). Fuel savings alone guarantee premiums won't disappear, however. If gas prices continue climbing, and more states adopt California-style emission standards, hybrids might seem like good deals. The question, of course, is whether automakers can translate these premiums into higher profits. I wouldn't hold my breath.
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Fool contributor
Chris Mallon
feels the pain of higher gas prices, and owns shares of Honda Motors through his private investment partnership.
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