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Diesels (still) equal savings

With the price of diesel fuel pushing $5 a gallon, many Americans might not think this is the best time to buy a diesel car or sport-utility vehicle. But they'd be mistaken.
Image: Mercedes-Benz GL320
The Mercedes-Benz GL320 Bluetec, pictured here, meets emmissions requirements in all 50 states, due to improved technology. BusinessWeek
/ Source: Business Week

With the price of diesel fuel pushing $5 a gallon, many Americans might not think this is the best time to buy a diesel car or sport-utility vehicle. But they'd be mistaken.

The fact of the matter is that even though the price of a gallon of diesel has climbed more than 20% in the past 12 months, diesel cars still offer better gas mileage—and savings—than regular cars. That's because diesel engines are much more efficient than gas engines, delivering up to 25% to 30% more miles per gallon.

That's good news for German import brands like Audi, BMW, Mercedes-Benz, and Volkswagen, who are launching a wave of new clean-diesel cars in the U.S. starting this fall and into 2009 and beyond. Domestic and Asian manufacturers also have plans to offer more diesels in the U.S. market.

But the timing of these new diesels isn't very auspicious. The sharp rise in diesel fuel has cut deeply into the diesel cost advantage in miles per gallon. There is real concern that unless refineries start producing more diesel, the prices will escalate beyond the point that a diesel can offer any cost benefit.

For example, Volkswagen plans to offer a diesel-powered Jetta starting in August that gets 41 mpg on the highway, according to an Environmental Protection Agency estimate (which VW calls conservative), vs. 29 mpg for the gasoline-powered model. That represents an estimated annual fuel-cost savings of about $308, based on 15,000 miles a year, despite higher diesel-fuel prices. But that same car a year ago would have offered 87% more in annual cost savings, or around $578.

According to a recent American Automobile Association report, the national average price for diesel was $4.52 per gallon, an increase of 55% from a year ago. In the same period, premium and regular gasoline each increased about 19%, to $4.18 and $3.79, respectively.

A whole new equation
That increase has already eaten up the advantage of older models such as the diesel-powered Jeep Grand Cherokee. It gets only 23 mpg on the highway, according to the EPA, vs. 20 mpg for the gasoline-powered Grand Cherokee.

A year ago, when diesel fuel was cheaper than regular gas, the diesel model would have saved almost an average $500 a year in fuel costs, based on 15,000 miles a year, at the EPA highway mileage estimate. Today, because diesel fuel is so much more expensive and because the mpg advantage for diesel Jeep Grand Cherokee is only about 15%, the diesel model would actually cost about $100 a year more to operate than the gasoline model.

Not only that, would-be diesel buyers should be aware that Jeep and its former partner, Mercedes-Benz, charge about $1,000 more for most diesel models than the gasoline equivalent. That means it may take a couple of years' worth of fuel-cost savings for the diesel just to break even with the gasoline model, before the diesel car starts saving money.

It takes about two years' worth of fuel-cost savings in the diesel Mercedes-Benz E320 Bluetec, for instance, to pay off the $1,000 premium, after which it starts to save about $500 a year in fuel.

Long-term, several factors have converged to make diesel more attractive in the U.S. Unlike the noisy, smelly, smoky, and underpowered diesels many American drivers remember from the early- to mid-1980s, today's diesels are quiet and powerful. Diesels account for more than half of new-car sales in several European markets where the price of a gallon of gas and of diesel cost approximately the same.

In the U.S., the federal government mandated cleaner, low-sulfur diesel fuel starting in 2006. Sulfur was a main ingredient in smelly diesel exhaust. The last hurdle to be jumped was that until recently, even the new and improved diesels couldn't pass tougher emissions standards in California, New York, and six other states that have adopted California-style regulations.

Only 5% market share in the U.S.
Despite the regulations, Mercedes-Benz offered "42-state" diesels, but didn't sell very many, since New York and California are among its biggest U.S. markets.

In the mid-1980s, diesels accounted for more than half of U.S. sales for Mercedes-Benz, before gas got cheaper and emissions rules got tougher. Through April, 2008, diesels accounted for only about 5% of U.S. sales year to date. That's about 9% of sales in the states where diesels can be sold. The total includes one 50-state diesel model, the Mercedes-Benz E320 Bluetec, which was introduced in late 2007.

Most other rivals, like BMW, opted to wait until emissions-control technology improved to the point where it could offer diesels in all 50 states. That point is now. But even though they are finally here, as long as diesel fuel continues to climb, many buyers may instead opt for even thriftier hybrids.