Diesel (as well as gasoline-electric hybrid) automobiles are typically sold at a higher price point than their petrol-only counterparts with the difference typically being several thousand dollars.

For example, the BMW 335d’s list price is $43,950 while a similarly-equipped 335i is $41,975.  The diesel-powered BMW X5 Sports Activity Vehicle (BMW parlance for SUV) has a sticker price of $51,300, while its petrol equivalent costs $47,600.

The price-leading Volkswagen Jetta TDI is $22,830 while the entry-level Jetta is a mere $17,775.    The Audi Q7 TDI lists for $50,900 (petrol version $46,900), making the Audi A3 TDI a relative bargain at $29,950, only $1200 more than the gasoline version.  Mercedes-Benz sells its diesel ML350 SUV at a $4000 premium over the $45,700 petrol version but, in the GL-Class, the diesel GL350 is actually the price leader at $59,950, while the larger displacement petrol version starts at $60,950.

In the hybrid world, the Honda Civic sedan starts at $15,665 while the Honda Civic Hybrid starts out with an $8145 higher price tag, although the hybrid model does include more standard equipment.

It’s clear that, for most of these vehicles, drivers would need a decade or more of 15,000-mile annual driving before seeing any savings.

As a result, sales of diesel-powered automobiles remained tiny compared to their petrol brethren.  When BMW launched the diesel X5 in December 2008, the percentage of buyers choosing the diesel powerplant remained in the single digits.

That is, until last July, when BMW’s Eco Credit arrived.

According to Dave Buchko, manager of Advanced Powertrain communications at BMW of North America, the pricing for diesels wasn’t arbitrary.  Rather, it was based on how much more the car – with diesel powerplant – was going to cost.

A diesel engine, compared to its petrol equivalent, is more expensive given the level of technology in the engine.  It runs at much higher pressures, requires more robust components and, in the United States, needs additional emissions controls.

In addition, BMW put a great deal of thought and effort into reengineering the 335d for the U.S. market.  Engineers repositioned rocker arms in the engine to make it quieter (an improvement that eventually made its way to non-U.S. engines) and moved the catalytic converters closer to the exhaust manifold so they can heat up faster.

While European engines have particulate traps, only the U.S. version has the urea system that scrubs the exhaust.  In addition, U.S. cars have more sound deadening material, resulting in reduced noise levels, and auxiliary heating, to allow the interior to warm up faster (diesels don’t  run as warm as gasoline engines and many drivers still remember how long it took the interiors of 1970s and 80s Mercedes and Volkswagen diesels to warm to a comfortable level).

Of course, what no one could predict was where the U.S. diesel market was heading and what buyers were prepared to pay.

What BMW and other automakers found out is that, especially with lower fuel prices, only a handful of individuals were willing to pay a premium for a diesel.

Enter the Eco Credit.  Timed to start with the launch for the U.S. government’s cash-for-clunkers program, BMW offered buyers of its diesel-powered automobiles a $4500 credit starting in July 2009.  Indeed, according to Buchko, the amount of the credit was partially influenced by the cash-for-clunkers rebates.

Since the Eco Credit started, BMW’s diesel sales have climbed significantly.  Diesel-powered X5s reached 25% of all X5 sales last November and 33% in December.  3er Series diesel sales hit a high of 366 units in December.  Audi, Mercedes-Benz, and Volkswagen are also reporting significant increases for their diesel lines.

In Europe, over 50% of new car registrations are for diesel-powered autos.  However, despite the recent gains in the U.S., the U.S. figure remains in the single digits.  But change is on the horizon.  The 2009 and 2010 Green Car of the Year awards went to diesels whereas earlier recipients were all hybrids.  Indeed, with the 335d, BMW has demonstrated that a diesel (with 425 pound-feet of torque) can appeal to enthusiasts as well as eco-conscious consumers.

With the Eco Credit, which BMW has no immediate plans to eliminate, the 335d actually costs $2225 less than the petrol-powered 335i before the IRS tax credit of $900 is even considered.  Better fuel economy, lower emissions, massive torque – who could turn down a deal like this?

While the 335d is the embodiment of the Ultimate Driving Machine, the X5 xDrive35d, which competes with the Audi Q7 TDI, Mercedes-Benz GL320 BlueTech, and the Volkswagen Touareg, is the performance leader in this crowd.

The diesel model is virtually indistinguishable in appearance from the 3.0-liter petrol model – until you lift the hood. Peer inside and you’ll see an all-aluminum, twin-turbo, 3.0-liter oil-burning I-6 that uses Bosch common-rail direct fuel injection (feeding fuel at up to 26,000 psi) with a compression ratio of 16.5:1. This provides the X5 xDrive35d owner with the performance of a V-8 with the fuel economy of a four-cylinder.

Where this X5 does distinguish itself is performance. While 265 horsepower at 4200 rpm doesn’t sound particularly impressive, with diesel engines, it’s really a question of the torque, in this case a massive 425 pound-feet of it.

With the help of the ZF-manufactured six-speed automatic gearbox and BMW’s xDrive all-wheel drive system, the driver might quickly forget he’s in an SAV. Unlike traditional trucks and SUVs, we found the X5’s handling to be exceptionally sure footed. It benefits from the BMW xDrive all-wheel drive system, which constantly adapts to changing road conditions, as well as multiple electronic systems including Electronic Damping Control (which controls body roll) and dynamic stability control (DSC), which can enhance handling if it senses understeer (front wheels receive no torque) or oversteer (front wheels receive maximum torque).

We took the X5 xDrive35d on a variety of trips, from local errands to long drives along scenic and windy parkways. The view from the driver’s seat was impressive. We found it true to BMW’s Freude am Fahren (the Joy of Driving) slogan whether on city streets or the open road. This was one large vehicle but it was eminently floggable nonetheless.

Inside the cabin, the diesel engine’s pleasant clamor was noticeable at low speed (unlike in other diesel-powered cars in its class) but it was virtually inaudible at speed. The interior has capacious amounts of space for its passengers, as befitting a car of this size. Thanks to the electric shifter and parking brake control, there’s an impressive amount of storage in the center console as well as a very large glove compartment.

Besides performance, in diesel guise the X5 has a significant price advantage over its petrol-powered V-8 stablemate. The diesel X5 starts at $52,175 (the V-8 starts at $57,175) and is eligible for BMW’s $4500 Eco Credit, making the actual cost a very attractive $47,675. On top of that the buyer is entitled to an $1800 tax credit and the knowledge that the diesel X5 can travel close to 600 miles on a tank of fuel, about 30% farther than the V-8.

(In fairness, it must be mentioned that the petrol-powered twin turbo X5 xDrive30i gets 21 mpg and sells for $48,475, only $800 more than the cost of the diesel X5.)

The X5 xDrive35d was introduced as a 2009 model; the current X5 body was introduced in 2007, replacing the original X5 that launched in 1999. All X5s are manufactured in Spartanburg, South Carolina. 30% of the X5s sold in December 2009 and 25% of the X5s sold in November 2009 were diesel models.