Catch-22: If Diesel Sales Boom, Will Their Cost Advantage Bust?

March 2, 2013
To a very small, select group of enthusiasts, diesel cars or utility vehicles have a lot of allure, with their strong, fuel-efficient engines and, for the most part, a great reputation for long-haul durability.

Yet for the rest of us who don’t delight in ‘b5’ biodiesel pumps or pine for compression ignition, whether or not it makes sense to buy a diesel is mostly a question of economics.

Motorists who cover more than the typical number of miles per year, and tend to do most of it on the highway, could see some reasonably strong cost advantages from driving a diesel car or utility vehicle, versus a gasoline version of the same. Their fuel savings alone, in many cases, could make up their somewhat higher sticker prices in just a few years.

But fuel costs are just part of the picture; the other reason why going with the diesel model keeps your costs lowest is that diesels—currently, and for years now—have had far superior resale value. In fact, if you're the type to trade every few years, they're commanding premiums that quickly negate—in some cases, before even figuring in the fuel savings—any premium you'll pay when new.

2010 Volkswagen Jetta Sportwagen TDI

2010 Volkswagen Jetta Sportwagen TDI

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For instance, according to Kelley Blue Book, assuming typical miles for both, a 2010 Volkswagen Jetta TDI is now commanding close to $19,900 ($22,830 MSRP when new), while an SEL sedan ($23,455 when new) is now worth about $16,500.

Diesel owners enjoying very low depreciation

According to recent data from ALG—one of the foremost authorities for residual values (predicted resale values)—used diesels are holding their value far better than used hybrids. The typical compact car, like the Chevrolet Cruze, retains about 53 percent of its original MSRP after 36 months. Compact hybrids, including the Toyota Prius, will retain 55 percent on average, estimates ALG, while diesel models will still be worth 63 percent of their original value.

With the introduction this year of the 2014 Jeep Grand Cherokee EcoDiesel, 2014 Chevrolet Cruze Clean Turbo Diesel, and Mazda 6 Diesel, the field of diesel models has grown in a way that should please diesel owners and new-car shoppers.

Meanwhile, sales of new diesels are already on the rise. Year-over-year, ALG notes that the overall diesel market share in 2012 rose from 1.5 percent up to 1.7 percent. Hybrids gained in 2012, too, and they remain about double that of diesels in overall U.S. market share, however.

Market gaining fast, but still small

Looking at 2012, year-over-year, Volkswagen more than doubled its passenger-car diesel sales (due in part to the mid-size Passat), while its sales of diesel light trucks were up 88 percent. Mercedes-Benz diesel sales are just a fraction of that, but this past year in the M-Class, (ML 350 Bluetec especially) it more than quadrupled its diesel light-truck sales.

Oddly, the factor that right now makes diesels so fiscally attractive—their trade-in value—might not do as well if the market has too many new diesels.

ALG, in a recent statement, confirmed that diesels' strong residuals have been in part due to their scarcity on the used-car market; so that as their supply increases, residuals could come down.

That, in turn, could erase the financial benefits of choosing a new diesel model in the first place—or possibly make leases prohibitively expensive if automakers put more diesels out than the market's ready for.

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