Will the Drop in Gasoline Prices Lower the Demand for Electric Vehicles?

Oil prices have declined roughly 50% in the past eight months, calling into question the future demand for electric vehicles (EVs). In fact, SUV and truck sales have increased to 53% of total US vehicle sales during the past six months (as shown below), hitting their highest share in a decade. Longer term, however, as EV prices decline, gasoline prices should diminish in importance.

In the short term, low gas prices will be one factor in the decision to buy a vehicle, but consumers may keep them in better perspective than most analysts expect. On an annual basis, fuel savings are a relatively small percentage of a vehicle’s sticker price.

For lower-end EVs, savings are below 3.5% of the car’s price, as shown below.[1] If gasoline prices were to move back to $3.50 per gallon, annual fuel savings still would be less than 6% of any EV’s price, as shown below. Even the outlier, the Tesla [TSLA] Model S, has been a success in the face of lower fuel prices despite its sticker price. According to Elon Musk, the company continues to sell every car it is able to produce.

Perhaps more important, the price of EVs will follow a technology cost curve, falling in line with battery prices over time. The Tesla battery pack system price will drop 40% by 2020, at which point it will account for only 15% of the vehicle price. In contrast, gas guzzling auto prices are likely to move up, as they have for the last decade.  EVs may seem to be at a disadvantage to traditional vehicles in the face of lower gasoline prices, but falling EV prices will have a more important impact over time.

While purchasers of Chevy [GM] Volts and Nissan [NSANY] Leafs may place a higher value on fuel savings than performance, buyers who can afford a higher priced Tesla are different. A California Center for Sustainable Energy survey showed that 39-46% of Volt and Leaf owners cite saving money on fuel as the primary reason for purchase, while only 1-4% prioritized performance [2] By contrast, the same survey shows that 21% of Tesla owners cited performance as driving their decision, while only 13% prioritized fuel savings.

Maintenance costs provide another important selling point for EVs. With only 1% of the number of parts of the average internal combustion engine (ICE) vehicle powertrain, EV maintenance costs should be a fraction of those associated with the ICE. Further, unlike a traditional vehicle, an EV can receive software updates that can improve performance and add to the value of the car continually. EVs will challenge the adage that a car drops significantly in value the moment it is driven off the lot.

A change in government policy would have a much greater impact on EV uptake than a change in the fuel price. Currently, EV buyers in the US receive a federal tax credit of $2,500 to $7,500, up to nine times the $800 per year that a smart electric drive owner saves in fuel costs. As government budget pressures subside in this economic upturn, and geopolitical turmoil focuses the public more on energy independence, the risk of such a change in tax policy should diminish.