Cheap Gas Puts the Squeeze on Hybrids and EVs

Earlier this year, Fiat Chrysler boss Sergio Marchionne joked that he hoped consumers wouldn’t buy the Fiat 500e (e for electric), because the company loses $14,000 on each one, given the cost of the technology inside. That shows the bind carmakers find themselves in these days: Americans have been buying more green cars of all types, but as gas prices plummet, companies have resorted to steep discounts to keep sales from stalling.

Automakers sold about 90,000 hybrid electrics, plug-in hybrid electrics and battery-powered electrics through September, a 30% increase over 2013 in what will likely be a record year. Sales of plug-ins–which can be recharged overnight–are up nearly 85%, according to the Electric Drive Transportation Association (EDTA).

But sales are sensitive to the price of gas. Last month green-car sales flagged by some 30% as average prices at the pump in the U.S. dropped to near $3 a gallon, the lowest since 2010. With oil at $80 a barrel and falling, cheap gas could be with us for a while.

The efficiency of old-line internal-combustion engines is also making green-car dealers’ lives harder. The passenger car’s fuel-economy average is now 36.5 m.p.g. (6.4 L/100 km), according to the U.S. Department of Transportation, and on its way to 54.5 m.p.g. (4.3 L/100 km) as a result of regulations implemented by the Obama Administration in 2012. That, along with gas prices, is making electrics less compelling. “When gas is $3 a gallon, people are saying, ‘Why do I need to?'” says Patrick Olsen, editor of Cars.com. “People are not willing to put up with the slight inconvenience of having to charge their car.”

Plug-ins like Marchionne’s Fiat 500e are still more cost-effective to drive. Owners pay the equivalent of $1.29 a gallon to run their cars, according to the U.S. Department of Energy. But so far, consumers aren’t doing the math. The differences among electric models also make it hard for the average consumer to make sense of the wider array of new, high-tech models.

To broaden plug-ins’ appeal beyond early adopters, car companies have been narrowing the premium usually paid over gas-powered cars. Ford lowered its Focus Electric price by $6,000, to $29,995, following a $4,000 cut last year. Throw in a maximum $7,500 federal tax credit and the price is less than $23,000. That’s on par with the higher-end gas-powered model. The 2014 and 2015 Chevy Volt are $5,000 cheaper than the 2013 model. Tesla, the California luxury electric manufacturer, is making its leases 25% cheaper and offering a 90-day return policy with a new lease.

The larger problem with plug-ins and battery-powered cars is that they tend to come in two varieties: very pricey statement cars, like the BMW i8 ($135,700), or small cars packed with expensive battery technology that pushes the price up. Both have proved to be a tough sell, even though cars like the Nissan Leaf (pictured) and the Chevy Volt are great drives. At a recent automotive tech conference, a Ford executive said the industry needs to produce more affordable mid- and full-size cars to truly make plug-ins popular.

The industry has also yet to mollify consumer anxiety over battery life, especially in the Northern states, where cold winters can cut range short. Most electrics can’t go beyond 100 miles (160 km) before recharging in normal conditions. Inevitably, battery life will improve as costs decline. That’s the way of technology. “It’s still more of a long-term play,” says Ford sales guru Erich Merkle. “Battery, ranges, speed of charge, infrastructure–a lot of things that are yet to be developed.”

Automakers plan to introduce some 20 new models by 2016, according to the EDTA. That includes a next-gen Volt with an extended-range propulsion system.

American car buyers can be a shortsighted group. Up through the early 2000s, they opted for big SUVs as gas prices stayed low. Then prices spiked, and consumers scrambled to find more-efficient rides. “We are going to get back to $5 gasoline for some reason at some point. Then people will be screaming,” says Olsen. Maybe by then they’ll even be screaming for electrics.