Ken Silverstein EnergyBiz Insider Editor-in-Chief

Enter hybrid vehicles, which run on both a gas engine and electric-powered batteries. More efficient production and longer battery times are helping to bring down the costs of fuel and maintenance--a trend that may make such cars competitive with petroleum-fueled ones by the end of the decade. Indeed, such vehicles are marketed as combining the best features of internal combustion engines and electric batteries, resulting in superior gas mileage and without hurting performance.

"I think hybrids have enormous promise," says Alfred Marcus, professor of strategic management at the University of Minnesota in Minneapolis. "Unlike hydrogen-based cars, this hybrid technology is not an enormous technological stretch. If the U.S. had a goal that 50 percent of all vehicles on the road in 10 years would be some form of hybrid, gasoline consumption could go down by a quarter."

At present, hybrids make up less than one percent of the total number of cars on all U.S. roads. But with the highest-ever gas prices, their prospects look good. In this country, hybrid registrations at state motor vehicle offices indicate an 81 percent increase from 2003 to 2004. Specifically and according to RL Polk & Co. that tracks such things, there were nearly 46,000 hybrids registered in 2003 and more than 83,000 registered in 2004. Their numbers are expected to continue increasing.

Hybrid vehicles can vary from smaller gas efficient ones to sports utility vehicles that place more emphasis on performance. Toyota has 64 percent of the market while Honda has 31 percent, says JD Power and Associates. Those companies say their models get 50 miles to the gallon compared to about 30 miles to the gallon for conventional gas engines. Altogether, there are about 10 different hybrid models that are being made in 2005. Within five years, such cars are expected to comprise as many as 20 percent of auto sales.

But what about cars that use fuel cells? "Clearly, fuel cell vehicles are not currently economically feasible," says Ali Emadi, director of Advanced Automotive Systems at Illinois Institute of Technology in Chicago. "In addition, their overall efficiency is less than hybrids. Therefore, hybrids are going to be more and more popular every year. In fact, I believe that this is the trend not only for the short term, but also for the long term."

Hybrids use an internal combustion engine that runs on petroleum. But, unlike conventional cars, they convert energy during braking or coasting and store that in a battery used by the electric motor. That conversion process is using energy that is normally wasted by all gas cars. That's why hybrids get better gas mileage in the city.

A key issue is that the hybrids cost about $3,500 to $5,000 more than traditional cars and the gas savings don't stretch that much unless the car is kept a long time. Professor Marcus says that if gas prices remain around $2.50 a gallon, the pay-off for motorists would take five to seven years.

To motivate consumers, the U.S. government gives buyers of hybrids a $2,000 tax deduction, although that number is to be gradually whittled down until it is phased out. Beyond that, many states give additional tax incentives to hybrid owners. And certain states such as California and seven in the Northeast are seeking to cut greenhouse gas emissions by cars 30 percent within 11 years.

The Challenges

Certainly, hybrid vehicles are a relatively new innovation and as such, carry some risks. Critics say that hybrids have gained traction in the last three years and that no one really knows how well such cars will perform over several years. Batteries are an expensive component of these cars and some consumers worry about the cost of replacing them once warranties run out.

Battery packs currently run $4,900, although any replacement may only involve "modules" that cost much less. Moreover, carmakers insist that the price of these batteries will only decline once these autos gain greater market share. At the same time, oil prices are always fluctuating and they may drop precipitously, making hybrids less attractive to some consumers worried about a faster return on their investment.

Companies such as Nissan Motor Co. are not yet convinced that hybrids have arrived. "They make a nice story but they are not a good business story yet because the value is lower than their costs," says Carlos Ghosn, CEO of the carmaker, in a public statement. That said, Nissan is producing a hybrid for sale in California only--to meet strict new air quality standards set by regulators there. Ghosn doesn't expect the car to be profitable.

Hybrid technologies will only get cheaper and better. At some point in the near term, batteries will be re-chargeable from an electrical outlet. Then, a hybrid could get as much as 100 miles to the gallon, say experts. Scientists and manufacturers are working on this. Utility industry research arm EPRI and Daimler-Chrysler are developing a so-called plug-in hybrid electric version of one of the carmaker's trucks.

"Thanks to their bigger battery, plug-in hybrid vehicles can operate just like electric vehicles, in all-electric mode for a significant range (for example, 20-40 miles); beyond that range, they operate like hybrid electric vehicles," says Palo Alto-based EPRI. "Plug-in hybrid vehicles can be zero-emission vehicles in sensitive air quality areas. Plug-in hybrid vehicles should be of high interest to electric utilities," it adds, noting electricity loads would grow with market penetration.

In the long term, fuel cells that combine hydrogen and oxygen to make electricity might be the solution to reducing oil consumption. And while just about every auto manufacturer is working on this, the idea is at least 15 to 20 years from fruition. For now, if drivers want to reduce their gas bills and emit fewer pollutants while driving, they can either choose to buy smaller cars or hybrid vehicles.

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