"Diesel engines tend to use less gas in city driving than highway driving".
I think it is exactly the opposite. As an example, the Diesel. 2013 Volkswagen Beetle gets 28 mpg in the city, and 41 in the highway. Hybrids do very well in the city, because they use no gas at all when you are stopped at a stoplight. Hybrids get good mileage by using an Atkinson cycle which sacrifices power for efficiency, and uses the electric motor to make up for the loss of power for a win.
I would think that a diesel engine would work even better than an Atkinson cycle engine to make the ultimate hybrid--great mileage in the city, great mileage on the highway, and electric power to boost acceleration.
Diesel trains are actually electric hybrids, why can't we do this with our cars?
Unlike a gas engine, Diesel engines tend to use less gas in city driving than highway driving. That is but one reason they are favored by taxi drivers and more and more consumers in Europe where driving distances tend to me much shorter than in the US.
It is true that they cost more to produce, but as the cost of gas engines is also going up, the difference is less that it has ever been.
For a given engine weight, they also produce less power, unless mated to a turbo compressor, which also increases te cost.
I do not think Diesel will displace gas engine or give much competition to electric in the future, but today, they can be effective for people who do a lot of city driving.
Diesel is popular across Europe but, due to popularity, Diesel fuel is getting more expensive. Finally better efficiency of Diesel cannot compensate higher initial investment and fuel costs, so people are looking recently for standard engines.
Diesel is not the answer. It only costs ~ $8 to charge Tesla's 85kW battery - good for ~ 250 miles. If we manage to double the battery capacity and build a network of standardized superchargers, that will take care of the 100+ year old variation on the steam engine that we have been forced to use. It is getting close though.