The Fuse

What Low Oil Prices Mean for Electric Vehicles

by Jeffrey Gerlach | January 20, 2016

Oil prices declined more than 70 percent over the past 15 months, recently closing below $30 a barrel for the first time in 12 years. Consequently, over the same period, gasoline prices plummeted from $3.14 a gallon in October of 2014, and now hover around just $2.00. Low prices, which are expected to persist through at least 2016 according to the U.S. Energy Information Administration, propelled automakers to a record year in which they sold 17.5 million cars and light trucks. Over half of all vehicles sold in 2015 were either light trucks or SUVs, and while low fuel prices may nudge consumers toward such vehicles, it is less obvious how a sustained low-price environment will affect the growing market for electric vehicles.

Low prices propelled automakers to a record year in which they sold 17.5 million cars and light trucks.

At first glance, 2015 was a down year for electric vehicles, with sales slipping by approximately 2.9 percent year over year, dropping to 115,262. However, December 2015 witnessed the single strongest month on record for electric vehicles yet, breaking 13,000 for the first time according to data compiled by Higher-end vehicles such as Tesla’s Model S and BMW’s i3 both saw strong sales increases in 2015 (56 percent and 81 percent, respectively). Sales of more moderately priced electric vehicles, such as the Chevy Volt and Nissan LEAF were down, likely due to the anticipated release of new models with longer range and updated features. While low fuel prices may have been an influencing factor in the tepid 2015 sales, sales are still moving on a strong upward trajectory that is unlikely to reverse no matter what direction oil goes.

evs gas prices

Bigger transformations underway

Despite the precipitous drop in oil prices, and current demand for gas guzzlers, automakers are not shying away from electric vehicles. To date almost all automakers have developed a vehicle that utilizes electric propulsion, and many see the technology being an integral part of their business strategy in the coming years. For example, Audi expects 25 percent of sales to come from electric vehicles within ten years, while GM is aiming for 40 percent fleet electrification by 2020. Ford is also investing $4.5 billion in the technology and plans to add 13 electric models over the next several years. Most other automakers have similar plans, and major tech companies already have or may soon join the race as well.

Although the shale of electric vehicles in the total car market remains relatively low (around 2 percent of all light-duty vehicles), there is undeniable momentum in the automotive industry to move toward electrification. One reason for this is regulation, as automakers strive to meet the aggressive fuel economy standards of 54.5 m.p.g. by 2025. California’s zero-emission vehicle mandate—adopted by 9 other states—is another driving factor underpinning U.S. electric vehicle sales.

New partnerships between automotive manufacturers and technology companies also promise to upend the current model, which benefits internal combustion engine vehicles.

New partnerships between automotive manufacturers and technology companies also promise to upend the current model, which benefits internal combustion engine vehicles. Driverless cars, many of which were on display at CES last week, will be rolled out within the next few years. Transportation network companies such as Uber and Lyft, when combined with driverless technology, will likely pave the way for electric vehicles to make significant advances. Meanwhile, Barclays estimates that driverless cars will cut U.S. automobile sales by 40 percent by 2040, estimating that shared on-demand mobility has the potential to make personal vehicles relatively obsolete. Such on-demand fleets will likely travel tens of thousands more miles per year relative to personal cars, which sit idle the vast majority of the time, and due to lower operating costs (even with gasoline at $2.00 a gallon) the higher upfront cost of electric vehicles well worth the investment for providers of on-demand mobility.

Automakers are taking notice of the possible changes to the personal mobility landscape and are investing in the technology out of a need to remain competitive. GM and Lyft recently announced a partnership to develop an “autonomous on-demand network,” while Ford and Google have also been in talks regarding a similar partnership.

Technological barriers remain

While the automotive industry is likely to experience disruptive change in the next decade, battery technology needs to improve if electric vehicles are ever going to overtake traditional internal combustion engines. Many consumers are reluctant to adopt limited range electric models, but automakers believe that as the range of these vehicles approaches 200 miles at an affordable cost, many will change their mind. In addition, the growing number of publicly available electric vehicle charging stations, which stands today at more than 10,000, will also help alleviate the “range anxiety” deterring people from adoption.

Dealing with these concerns has not been easy for automakers, but there is reason to believe that these challenges can be overcome in the near future. Tesla plans to release the Model 3 with a $30,000 cost as early as 2017, and GM recently unveiled the Chevrolet Bolt which is expected to have a similar price point. GM also announced that the battery costs per cell for their yet-to-be released Bolt is a mere $145 per kilowatt-hour, setting a new standard for the industry.

Despite the fact that electric vehicles sales were down slightly in 2015, the next few years will truly determine the future of automobiles. Although oil prices are expected to remain low for the foreseeable future, a new paradigm of mobility is emerging. That paradigm will largely ignore the vicissitudes of the oil market, and is likely to open the door for widespread adoption of electric vehicles.