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As Demand for Fuel-Efficient Cars Rises, So Do Their Price Tags

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Lower-income Americans are most interested in reducing their fuel costs. Higher-income Americans are most able to afford hybrid vehicles.

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Americans recognized the need for more energy-efficient cars, long before terms like "green" and "hybrid" became part of the vernacular. According to a PBS timeline, the very first bill introducing an electric car as a means of environmental protection dates back to 1966; 33 million Americans said they were on board with the idea. In 1972, General Motors (GM) introduced a hybrid Buick Skylark for the 1970 Federal Clean Car Incentive Program (an initiative that was later killed). But, with gas prices now hovering around $4 a gallon, American car buyers are showing renewed interest in fuel-efficient cars, more than 30 years since the technology should have changed the industry. But can the buyers who most need the cars afford them?

Price is one of primary the reasons fuel-efficient cars haven't become the preferred automobile of choice. When the fuel-efficient market leader the Toyota (TM) Prius gained attention, thanks to purchases from early adopters and influencers in 2006, 57% of Americans, mostly upper-income responders, indicated in a Gallup Poll that they would consider buying a hybrid vehicle when replacing their current car.

However, stated intent didn't translate into purchases, likely due to looming sticker shock. While there is a long-term cost and environmental benefit to driving a fuel-efficient vehicle, the hybrid sticker price hasn't historically been low enough for many Americans to make the switch. (The consensus is that the existing price differential between a traditional model and a hybrid counterpart to be significantly narrower than $5,000).

However, high prices at the gas pump may have finally convinced Americans that fuel-efficient cars are worth their upfront investment. According to a survey conducted by AutoTrader.com in March and April, 62% of car shoppers are considering purchasing a vehicle that is more fuel-efficient than the one they currently drive. AutoTrader April data based on consumer search results for used inventory indicates that interest in fuel-efficient models like the Hyundai Elantra and Kia Optima have increased, while demand for larger SUV and trucks has waned. The Ford (F) Focus, Hyundai Sonata, and Chevrolet Cruze search data also indicates significant signs of increased consumer interest.

According to a recent Gallup Poll, lower-income Americans report the greatest levels of interest in fuel-efficient cars, likely because they are most impacted by higher gas prices. (Interestingly, the renewed interest in fuel-efficient cars was born after the Federal tax credit incentive of up to $3,400 for owning a fuel-efficient car expired in December 2010). But, the data presents a conundrum: actual purchases of fuel-efficient vehicles may still be contingent on the price, which is steadily rising with increased demand.

Phil Reed, senior consumer advice editor for Edmunds.com says that automakers (most notably Ford) began to revamp their fuel-efficient lineup in 2008, the first time gas prices spiked, and are now more equipped to deliver fuel-efficient inventory than they were in the past, with a host of cars that boast 40 miles per gallon (mpg).

However, Reed notes that despite what consumers often say in polls, their interest in SUVs remains paradoxically high -- even in times of high gas prices. "It's a bit hard to sort out the stated interest (people always say they want better fuel economy) from the actual buying decision (often, they swing back toward large cars at the last moment). Americans believe gas prices should be low. This tends to make people believe that high gas prices are an aberration, " he says.

When gas prices creep up, consumers frequently demonstrate renewed interest in the Toyota Prius, as "the go-to gas sipper," says Reed. But as demand rises, so does Prius' price tag, a situation that has intensified in the aftermath of the recent earthquake in Japan. While Toyota expects Prius' American inventory to recover to 70% by summer, Reed says that "supplies are tightening, and the prices are rising quickly."

Toyota has also announced plans to expand the Prius brand with the Prius v gasoline-electric model, which has more cargo space than the existing model, to accommodate buyers looking for both fuel-efficient benefits and a roomier vehicle. Bob Carter, group vice president for Toyota's U.S. sales, told Bloomberg "we know the hybrid segment will grow faster if we add a little versatility. It won't happen in the next 12 to 24 months, but Prius will outsell Camry. It's going to be what defines the Toyota brand in the future." The model will debut for sale in summer 2011.

While reduced fuel-efficient inventory and rising prices aren't good news for already cash-strapped consumers, the shift in vehicle choice may provide a much- needed boost for the American auto industry. General Motors recently announced plans to add up to 400 workers and invest $260 million at a Toledo, Ohio factory a move that is part of a larger investment at plants in eight states, according to the Detroit Free Press.
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