Fears Rise That Low Gas Prices Will Hurt Electric Cars

By · December 09, 2014

BMW i3 at gas station

Photo: Tom Moloughney

Gasoline prices in the U.S. have steadily fallen in the past three months, reaching a national average of $2.66 per gallon, according to AAA. Industry analysts and journalists have been quick to jump to the conclusion that the dip in gas prices spells the demise of electric cars. There’s no doubt that lower gas prices undermines a key selling point for battery-powered vehicles: reduced fueling expenses. But any quick and firm declarations about the long-term forecast for EVs based on current gas prices should be questioned.

In late October, a headline from Christian Science Monitor asked: “Will Falling Gas Prices Kill the Electric Car?” Last week, The Motley Fool similarly questioned: “Will Cheap Gas Prices Crush Electric Car Sales?” Some analysts are ready to make the call. “With the low oil prices, people will think ‘I can buy a normal car, it’s more beneficial that way,’” Ole Hui, a Hong Kong-based analyst at Mizuho Securities Asia Ltd., told Bloomberg. “There’s less incentive to go to electric vehicles.”

But Ben Kallo, an analyst with Robert W. Baird & Co., also speaking with Bloomberg, said, “Although the recent decline in oil prices has caused concern about EV demand, we believe EV purchasers are focused on the long-term benefit of not being exposed to oil price fluctuations.”

No Single Factor

That sounds right, especially when looking at the sales numbers. It sounds dramatic to say that Chevy Volt sales in November 2014 dropped 30 percent compared to the previous November, and that cumulative 2014 Volt sales are 16 percent lower than last year. It also looks bad that annual sales of the Prius Plug-in Hybrid are down 59 percent for the year. But as usual, the devil is in the details. Both of these models are reaching the end of their product cycle, with new and improved versions expected next year. That’s the normal sales cycle for an aging product.

When you look across the entire plug-in market, you discover that sales of plug-in hybrids are up 17 percent for the year, and battery-electric vehicles have jumped by nearly 31 percent. Sales of pure EVs in November 2014 were 52 percent higher than November 2013—when gas prices on average were about $0.60 more expensive.

Tesla doesn’t report sales numbers, so analysts instead look to declining Tesla stock prices—as if today’s investor sentiment was any predictor of the viability of the auto industry’s long-term shift to electric motors and batteries. It’s hard to believe that many buyers of a Tesla Model S—with a starting base price of $81,000—would shift a purchase decision based on saving about $110 a month in fuel costs compared to a 24-mpg gas car, instead of about $160 a month. That, according to fueleconomy.gov, is how a shift from $4 a gallon to $3 a gallon would affect the relative fuel savings of a Model S.

In other words, in a period of lower gas prices, the cost advantage of using electricity instead of gasoline, shifts from stellar to very good. Of course, gas prices are subject to change, so the current decline creates the possibility for an oil price rebound that could increase EV popularity in the future. As Ben Kallo pointed out, the price of gasoline on any one day, or one month, is less critical than overall price volatility.

Perhaps most importantly, the EV market is still young. Availability of most models is limited to California and a few markets. The cost of batteries has not benefitted from economies of scale. And many of the buyers are considered “early adopters,” consumers who are willing to pay a price premium for the latest technology—especially for a car that represents reduced emissions, less reliance on oil extraction, and a refined driving experience. Who knows where gas prices will be when mainstream buyers can consider more affordable longer-range electric cars—available in a broader range of models and in more markets across the United States?

New to EVs? Start here

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