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Can Cheaper Oil Kill Tesla Motors And The Electric Car Movement?

19 March 2015 in Investing Insights

The Tesla motor company was founded in 2003 by a group of engineers in Silicon Valley who wanted to create an electric car to rival any normal gasoline powered car with efficiency, torque, and incredible power. As the name would imply, the initial designs for the power train of these electric cars were based on the designs of Nikola Tesla, the famous inventor of the late 1800’s. Today, Tesla Motors is still producing cars, but as gasoline prices are off their historic highs, analysts are considering the question of whether the electric car movement will fade into the background, if gasoline-powered cars that are still the majority favorite, are more affordable to operate.

The Price Collapse of Oil

There are four main reasons why the price of oil has tanked(since the summer of 2014). Oil prices remain at lows not seen since 2009 near $60.00 per barrel, compared to prices over $100 per barrel less than a year ago.

1) Demand is low – The economy has improved since the financial crisis, but it is still quite fragile and has been a factor in keeping demand for oil low, along with improved efficiencies and the availability of other alternative fuels.

2) Turmoil is not impacting oil output–While there are many disagreements and threats in the Middle-East, the production of oil has not slowed down. Between Libya and Iraq alone, 4 million barrels of oil are being produced each day.

3) The United States tops supply – It comes as a surprise to many, but over the years, the United States has increased their production efforts and has become the largest oil producer in the entire world! With less dependence on overseas production, oil has remained more of a constant in terms of supply.

4) Overseas production has not been curbed – The larger oil producing countries like Saudi Arabia and Russia were expected to regulate their production based on the demand. But, with decreased demand in recent months, these countries have decided to continually produce their maximum supply.

In short, basic economics states that decreased demand and increased supply leads to a decreased price, and that is exactly what is happening with the price of oil. As long as supply remains high and demand remains low, the prices should remain relatively low. Of course, history has told the oil prices rarely remain stable for prolonged periods and are subject to rapid changes.

The Cost of Electric vs. Gasoline

The Tesla is unlike any other electric-powered vehicle on the market. Instead of a small, cramped, cube-shaped vehicle that’s difficult to get in and out of, the Tesla is stylish and luxurious, battling the likes of the BMW 535i.In fact, many high-end customers are beginning to wonder how viable the Tesla option is for them. The initial price points are not that different, and if the Tesla is noticeably cheaper on fuel (electric vs. premium gasoline), then switching to a Tesla can become a very serious thought of typically BMW owners.

For example, the 2014 BMW 535i has an average fuel economy of 24 miles per gallon. With the current price of premium gasoline around $2.84, the cost to drive this BMW 100 miles costs approximately $11.50. The average price of electricity is $0.12 per kilowatt-hour and assuming that you have a 240V outlet handy, the average time to charge the Tesla S takes 3 hours and 24 minutes plus 33 kilowatts of energy, which equates to a $3.96 cost per 100 miles of charge. The running cost of the Tesla based on fuel alone is approximately 64% cheaper than the BMW 535i. That is quite a savings, even with cheaper gas prices, however, there are other things to consider.

The Economics of the Electric Car

As gasoline prices were historically inching up and up from year to year, the electric car continued to make more and more sense. When comparing the cost per trip based on fuel costs alone, electric cars have typically won without a fight. However, there are other costs that savvy customers are factoring in before they commit to a purchase; namely the cost of the fuel cell and the limitation on travel that comes with electric vehicles.

Many electric models can cost far more than the typical gasoline models simply because the fuel cells or rechargeable batteries that power them are quite expensive. And owners can find themselves forking over thousands of dollars for replacements due to wear and tear after a few years, depending on the make and model of the vehicle. The debates over whether fuel cells or lithium-ion batteries are better continue as well. Elon Musk has said, “I don’t think fuel cells are a viable path…Even the best theoretical fuel cell doesn’t compete with batteries. It doesn’t seem like the right move.” Costs of lithium-ion batteries, which Tesla and other car manufacturers like Nissan use, are projected to continue declining. But Toyota is staying away from lithium-ion batteries and is busy focusing on fuel cells.

Another concern consumers have with electric vehicles compared to gas revolves around the limited distance that one can drive on a single charge. For example, the Tesla Model S has a range of around 250 miles while the Nissan Leaf range is only around 85 miles.

Since electric charging stations aren’t readily available in every town, one must either limit their driving to their neighborhood or carefully plan long trips along routes that have charging centers available. Neither option is ideal nor as convenient as gas powered vehicles, which makes electric cars that much more difficult to justify.

The Past and Future of Tesla

The original mission of Tesla is quite impressive and noble. Again, the company wanted to provide a sustainable vehicle that rivaled the luxuriousness, usefulness, and visual appeal of a regular automobile. Part of this mission was fulfilled with their lithium-ion battery. Instead of limiting the vehicle’s traveling distance to 80 miles as the typical electric car does, Tesla’s batteries can last 265 miles per charge. This innovation alone has placed them in a class of their own and made the electric car a more viable choice for many.

Over the years, Tesla has seen their stock price soar to $286 per share (September, 2014), but within the past couple of quarters, the stock has been regressing. And, in their most recent press release, Tesla announced that their net income in the fourth quarter was negative, which marks the second quarter in a row of negative profits.

MOTIF-Teslsa-March-chart-2014-2015

The market reacted to the disappointing news, taking Tesla’s stock price down by more than 8% on the day of the release. According to the executives, the shortage in demand was due to severe winter weather, customers’ vacation schedules, and because of issues with shipping

One has to wonder how much the price of gasoline is impacting the sale of the Tesla. After all, the biggest selling point for electric vehicles is the savings one can accumulate by fueling their car with electricity instead of gasoline! If there are very little savings, could the market for electric vehicles remain strong? Has the decrease in demand already indicated the volatility in relation to the price of gas? Can the environmental benefit or access to commuter lanes continue to help carry some of that demand for electric vehicles even if the cost benefit decreases? If this is the case for Tesla and the price of oil remains low, there may be difficult times for not only Tesla, but perhaps the entire electric vehicle segment.

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Update 3/25: The original article incorrectly referenced Tesla cars as using fuel cells instead of lithium-ion batteries. The article has been updated to reflect the correct technology.

  1. Ken Drobish
    21 Mar at 3:10 am

    “Fuel cell” does not mean what you think it means. Tesla Motors has never made a fuel cell vehicle.

    Ken

    Reply
  2. Joe
    23 Mar at 8:13 pm

    “Part of this mission was fulfilled with their hydrogen fuel cell. Instead of limiting the vehicle’s traveling distance to 80 miles as the typical electric car does, Tesla developed a fuel cell that can last 265 miles per charge” – This is factually wrong. The Tesla CEO is known for referring to fuel cells as “extremely silly”. Tesla uses a lithium-ion battery.

    Reply
  3. Barry Borella
    25 Mar at 1:09 pm

    What about no fan belt, no spark plugs, no oil & no oil changes, no radiator, no coolant, no transmission & associated problems? Maintenance will be very low – just brakes & tires.

    Reply
  4. Dan
    25 Mar at 11:04 am

    A quick note to the authors of this article… Tesla cars do not have fuel cells. As a matter of fact Elon Musk refers to them as “fool cells” due to their low energy density and lack of infrastructure. Also the link between fuel cost and lack of deliveries in Q4 of the model S is questionable since the average cost of the model S (>100k) leads one to believe that the owners would not be as effected by the temporarily low cost off oil. There were a couple other points but I will refrain.

    Reply
  5. Bartley Wilson
    25 Mar at 11:33 am

    Indeed, demand for gas is down. Way down.

    So much so, that day traders are being told to brace themselves for “$30-per-barrel,” oil prices this summer. Why? Because a lot of cars out there don’t use gas like the Chevy Volt, the Nissan Leaf, and Tesla. Hybrids like the Toyota (Prius) and Hybrids have taken a huge dent out of the number of people buying gas (or diesel) at the pump.

    How far down is the demand for gasoline? I’m not a business analyst, but I’ve been studying the “alternatives to gas,” market for close to 15 years now.

    It’s hard to get a straight answer out of the government’s DOT reports. Big Oil won’t give me any kind of answer. My seventeen-plus letters I’ve written over the last 3 years to British Petroleum, Exxon and OPEC have yet to be returned with a single phone call, email or letter.

    It would be nice to know just how much LESS of a demand for gasoline we really have in America. It’s been said that all journeys start with the first step, so let’s start with my mom.

    My mom bought a Toyota Prius some years ago. She used to spend over $60 a month at the pump for gas on her Chevy Malibu. With her Toyota Prius, today she happily pays less than $16 a month. Multiply that $44-per-month savings x a few million other Prius owners and anyone can see that “demand for gas” isn’t what it used to be.

    The Toyota (first generation) Prius came out in 2000. In April, 2011 Toyota celebrated their one million Prius sale and they said that 90% of their first generation Prius were “still” on the road.

    Hybrid cars are not new. In fact, Henry Ford first came up with the idea of a gasoline-electric car in 1904 that would get 25-miles per gallon. In 1905, the Ford engineer that came up with the design (H. Piper) filed the patent for a the “petrol-electric hybrid car.”

    Take a look around at the cars, trucks and SUV’s whizzing past you the next time you hit the highway. My research suggests that, “one out of every 17 vehicles,” on the road today is either hybrid or fully electric. In 2010, that number was more like “one out of every 63.”

    Did you see that big Dodge or Chevy truck with the big white “Tylenol shaped tank,” in the bed of the truck? It’s powered by “Propane gas.” Another alternative to gasoline.

    America today is the #1 producer of natural gas, and for a lot of contractors, they’ve switched from diesel and gasoline to propane instead. It’s cheaper and burns cleaner (less carbon emissions out the tail pipe).

    The government’s idea of “Drill Baby, Drill,” has fallen flat, because the large oil companies are not really interested in drilling with oil falling to “2009 prices.” Black Gold is becoming more like “worthless black dirt.” The government subsidies America used to shell out to big oil to help pay for new drilling operations are drying up, too.

    Many Americans are clearly giving the “middle finger,” to big oil as there are so many ways to drop our “dependency on the pump.” We have a lot of choices: Bio-fuels made from bacteria, propane, vegetable oil, electric and now there’s a new focus on Hydrogen Cell Vehicles (FCV).

    Toyota has a new Hydrogen Fuel Vehicle in production right now. Yes, production. Not testing. Not prototype. It’s called the: Mirai (FCV) and comes out this October. Pre-orders are being taken now.

    Granted, “Big Oil,” and OPEC may be banking on the fact that Hydrogen Filling Stations (HFS’s) will start in California and take a decade to grow across the country. But that’s just wishful thinking.

    Because a few small entrepreneurs are rushing to build the affordable HCV chargers for your garage. These will be small pumps that take Hydrogen out of thin air, and compress it to your car’s storage overnight. The process is relatively simple:

    You suck in “air” into a chamber. You apply a small “zap” of electricity to oxygen molecules and it creates two (2) gases: (1) Hydrogen and (2) Ozone.

    You ever wonder why you smell “ozone” just before a huge storm approaches? When lightning strikes, it’s mother nature’s way of replenishing our ozone layer. This was an experiment I did in high school more than 30 years ago.

    Providing some idiot doesn’t come up with a twisted way to publish a diagram showing how to “pump Hydrogen into a home-made bomb,” on the Internet, maybe we’ll see HCV chargers hit the store shelves at Home Depot or Pep Boys by this Christmas?

    Reply
  6. John Lister
    25 Mar at 12:46 pm

    Tesla cars do not have a fuel cell. They are battery powered. The analysis is inaccurate and ignores critical factors that favor electrically powered over gasoline engine powered vehicles.

    Reply
  7. 25 Mar at 1:00 pm

    Thank you for your comments. The original article incorrectly referenced Tesla cars as using fuel cells instead of lithium-ion batteries. The article has been updated to reflect the correct technology.

    Reply
  8. Doug Fox
    25 Mar at 1:04 pm

    I think this is a very well researched and very sane article on a politically explosive topic. Some day people will look back are our times and will shake their heads and say, “What kind of people would allow a half a billion dollars of taxpayer money to go up in smoke in a company like Solyndra?” Or what kind of electorate would send a president back for a second term after his administration subsidized loans and grants for Abound Solar, Beacon Power, Ener1 all of which filed for bankruptcy soon after their president’s $80 billion clean-technology program got underway. The Obama administration poured roughly $5 billion in taxpayer funds into the electric-car industry. Most of the companies that got these funds were forced to shut down or to move away from their electric-car emphasis if they wanted to remain in business. Why after the failure of socialism in the former Soviet Union, and Europe would America turn to it? They will shake their heads in wonderment in the absolute naivety of the American people to put up with this nonsense during our times.

    How about building a motif that tries to take advantage of long term lower oil prices?

    Reply
    • Peter Breedveld
      26 Apr at 1:18 pm

      It would not be hard to create a motif that takes advantage of lower oil prices. Since so many companies benefit it would be a diverse fund. Airlines, auto industry, cargo, airplane manufacturing, agriculture, road paving, tourism and refining are a few industries that benefit from low oil prices.

      Reply

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