*Preface: Sorry if some links don’t work; most of the citations are Wall Street Journal articles, some of which require a subscription.
In this week’s civic issues blog I’m going to discuss how practical electric cars are given the current financial climate. Let us not kid ourselves, electric cars are the way of the future, and there will be a critical point over the next 20 years when the shift is made and the crude powered car will be an artifact left behind in the pre-21st century era. Yet, despite this certainty, the shift will not be made today. It will not be made this year. It may not even be made for years. This is essentially due to the massive effect the shift in oil prices has had on the long term (which I will define as the next 5-10 years) outlook.
There was a time mid-last year when the shift was beginning to be made. Oil had reached it’s peak price in history, and consumers were paying upwards of 4 dollars per gallon at the pump. But then something happened…Europe hit a recession…Then Chinese industrial growth stalled…And most importantly US entrepreneurs began to expand the shale oil industry at a massive rate.
What this meant for oil was significant. If one thinks back to the basis of economics, supply and demand, this can be envisioned as supply increasing dramatically (US shale boom) while simultaneously demand decreasing (European economic and Chinese industrial stagnation) which resulted in:
(Image from http://www.investing.com/commodities/crude-oil-streaming-chart)
So…uh…that escalated quickly. The chart above begins in august 2014 and ends as of today (2/4/2015), showing a net loss of 56% since it peaked at $110.70. While as a consumer, you’re probably loving this (sub $2.oo a gallon gas anyone?) it basically makes electric car demand hit rock bottom. Why? Because bottom line people care about money. When gas was $4 a gallon, the average consumer was thinking “Hey, this is pretty expensive! Where those electric cars at?”. When gas is sub $2 a gallon shortly after that however, the average consumer is thinking “Hey, gas is cheap! Where those massive trucks and sports cars at?” (Major auto sales up 14%, especially trucks and sport cars http://www.wsj.com/articles/chrysler-sales-jump-in-january-1422968401). This picture pretty much sums it up…
(Image: http://www.wsj.com/articles/chrysler-sales-jump-in-january-1422968401)
Depressing to say, but I feel that this chart pretty much illustrates my previous statement…Consumers pretty much only care about how things are going to affect their wallet. The average consumer for the most part does not care about the environment from a fiscal perspective, despite what they might otherwise say. And this is in essence why the electric car in the current climate is going to see major stagnation in terms of growth and demand. As a proxy I’ll use Tesla as representative of the entire electric car industry. Let’s take a look at their stock:
(Image: http://stockcharts.com/h-sc/ui)
The chart above represents the stock price of Tesla for the same period as the crude oil price chart I posted earlier (Price is the middle chart, volume is the bottom). Tesla stock peaks at $286.04 in early September, which is right where oil starts to go up after the initial slight drop, but then the overall change is a massive decrease. A 24% decrease in stock price in a period of about 5 months. Yikes. This is due to the massive decrease in sales of their electric cars as a result of the plunging oil prices. This correlation between Tesla’s stock price (and therefore the electric car industry) and the price of crude oil is undeniable in this circumstance; people just do not buy electric vehicles when there is no benefit to the consumer from a financial perspective.
However, despite this massive punch to the electric car industry, I feel that Elon Musk sums up the outlook quite well in his recent statement at the Detroit auto show which said “The need for sustainable transport is incredibly high. Even in the face of massively declining oil prices I think it only becomes more urgent that the industry advance its development of electric vehicles. It’s really just a question of when it goes fully electric, and if it goes sooner that will be good for the world.” (Linky: http://www.wsj.com/articles/tesla-china-sales-declined-significantly-ceo-says-1421186754). He however then goes on to state in the same address that Tesla should not expect to be profitable till 2020 in the face of the current economic climate (Same link as the last quote).
Looking forward for the period after the next 5 to 10 years, the passing of the torch from gas-powered to electric-run cars looks brighter than ever before. One can easily expect the demand to rise once again when gas begins to reach and surpass the $100 mark. Looking back at the stock price of Tesla chart, the major upward trend prior to the steep drop was when the price of oil was above $100, and demand for electric vehicles was at an all time high. Expect to see a boom even more the next time oil reaches this level, as Ford and GM will be coming out with more affordable consumer electric cars over the coming years (Price tag of 20k to 40k going online in 2017 if my memory serves me correctly). But for now, America loves its trucks, but electric cars are only a stone’s throw away.
Even if you don’t look at this issue from an economic perspective, and instead just notice that there are very, very few electric car “refueling” stations in most states, or that there aren’t many mechanics who specialize in repairing electric cars, etc, it’s easy to see that it’ll be more than a few years before America switches to electric. But I wonder if people seeing the predicted affects of global warming, such as coastline flooding, will make people think less with their wallets and expedite the switch.
I really like how you tied this post into your passion post of oil and its prices. I never really thought about how the oil price would affect electric car demand, but what you are saying actually makes complete sense; the majority of people only care about their money, so they are going to do what is cheapest. And with the price of oil being so low, as you also detailed in your passion blog, right now no one seems to feel a need for electric cars. What really amazes me is almost how indirectly the Tesla stock and oil commodities correlate- the minute one rises the other starts to drop. I thought that they may correlate somewhat, probably not showing a super strong resemblance of one another, but the graphs you have shown prove otherwise. Nice job
I find it really interesting how the care for the environment is correlational to the price of gas. Most people would pick whatever car they wanted, until they realized some would be more expensive than others. I think it’s not so much that they don’t care to further develop electric cars, most probably feel it’s not the priority so long as gas prices stay low. There are always those people like Zach talked about, though: coal rollers. I thought it was really interesting and really understandable from a person who isn’t very knowledgable on economics.