I have followed this very closely. Currently there is a company with an aftermarket kit for the prius, toyota's 4-place hybrid, that uses lithium batteries and goes about 35 miles before needing a charge. At night, when the strain on the electrical grid is the lowest, it charges to full in approximately 9 hours using $1 in electricity*. It adveraged 150 MPG traveling at speeds <55 MPH and 100 MPG traveling at speeds 65 MPH or higher. This is of course, assuming one doesn't drive beyond its 35 mile range in a day. Some will, most will not. The average commute is something like 13 miles each way.

While the kit voids the warranty, toyota stated that they have plans to launch their version in approximately 3 years. I have an older car (11 years old, thankfully still running) and plan to purchase this car once it comes out.

I could even invision a plug-in hybrid powered by a diesel engine, burning biodiesel. I believe that might be able to completely wean the US comsumer off of oil, and leave the US's domestically produced 12 million bbl/day enough to cover our other uses (truck/boat/aircraft uses).

A problem I can see however is that more and more people will be purchasing "trucks" and registering them as such. If gas prices fall to say $2/gallon after the introduction of these plug-in hybrids everyone and their brother would start buying trucks again. You'd have to come up with a way to limit petrol based products to those industries that compeletly depend on it.

I also agree with your cost per gallon assumptions. $3/gal hardly put a dent in demand. $5/gal might start having a major effect, however it probably won't be a large problem to the economy until it hits around $6, $7, possibly $10/gallon. If it happens it relatively short order it will be a bigger problem than if it were spread out over say, 3-4 years.