« The Solar Trade Wars: Which Side Are You On? | Main | Tier One Chinese Solar To Continue To Outperform »


       

Electric Vehicles: No House of Cards

Tom Konrad CFA

Once again, John Petersen  has gone too far with his petrol-head arguments against Electric Vehicles (EVs.)

In a recent article fetchingly titled, , he argues that because "the incremental cost of vehicle electrification [is] an up-front capital investment of $190 for each equivalent barrel of oil saved." Since the oil price currently barely tops $100, he considers this (to put it mildly) a bad investment.  He concludes,
Electric drive proponents are selling a house of cards based on fundamentally flawed assumptions and glittering generalities that have nothing to do with real world economics. Their elegant theories and justifications cannot withstand paper, pencil and a four function calculator.
He's quite right that pro-EV arguments don't stand up to "paper, pencil and a four function calculator."  That's because, in order to use these crude methods, he has to make a number of simplifying assumptions which have the side-effect of understating the benefits of electrified transportation.

False Assumption: The only benefit to EVs is oil savings.

To get his $190 cost for each barrel of oil saved, he divides the barrels saved by the additional cost of an EV.  But if there are other benefits to EVs, then some of that incremental cost should be allocated to the other benefits, not to reducing oil consumption.  Here are a few advantages of EVs he ignores.
  • No oil changes/ less maintenance.  This saves both direct costs, and the owner's time.
  • No trips to the gas station.  How much time do we waste (and extra miles do we drive) going to the gas station (or even going a few miles out of our way to get the best price on gas)?  With all the attention to range anxiety, there seems to be very little attention to the fact that your car recharges while you sleep.  Do you know anyone who enjoys spending time in a gas stations?  Not driving to gas stations probably saves an additional gallon per year, and the driver's time is of course valuable, too.
  • Quieter ride.  Many luxury car owners are willing to pay a lot for a quieter ride, so it must have some value.
  • Potential to make money selling frequency regulation to the grid.  This much-talked about concept still needs regulations and market structures to make it practical, so while I think it deserves a mention, I won't give it any value in my calculations.
  • Batteries in base of car lowering center of gravity and improving handling.
  • No tailpipe emissions.  Since car exhaust often infiltrates into homes via connections to the garage, this should be seen as a benefit to anyone who has an attached garage and cares about their own and their family's health.

Using Peterson's estimated savings of 104 barrels of oil over the course of a decade, each $1040 we attribute to the above benefits of EVs should reduce the cost of a barrel of oil saved by $10.  I'd say $1040 would be a very low-end estimate of the above benefits, while $5200 would be a high-end estimate, so the cost of saving a barrel of oil through vehicle electrification is between $140 and $180 once we take these benefits of EVs into account.

Price Stability

An EV buyer is essentially purchasing her fuel savings up-front, at a fixed price, partly because it costs much less per mile to drive an EV than an conventional vehicle, and partly because electricity prices are much more stable than gasoline prices.

Price stability is valuable in itself, since it allows much more effective budgeting.  Many people buy oil or propane to heat their homes in advance in order to lock in a fixed price, so they must value the price stability.  An EV is an opportunity to lock in most of the fuel price for the life of the vehicle.  Even if that price is $140 or $180 per barrel of oil, it still will have value to some drivers.

Will the price of oil average more than $140 over the coming decade?  I think the chances are high.  There is even a decent chance that oil prices will average more than $180 over the next decade, in which case an EV buyer today will be quite pleased with herself five or ten years from now.

Driving Habits

Finally, as I have discussed previously, not everyone is an average driver.  Drivers with regular commutes who have the opportunity to charge their vehicles more than once per day gain significantly more benefit from plug-in vehicles than drivers who charge their vehicles less often per day.

EVs are not an economic option for everyone, or even for most drivers.  Drivers who can use more than the full range of their vehicle per day by charging more than once, and drivers who place high values on the other benefits of EVs describe above, may find that electric vehicles make economic sense. 

Conclusion

Are electric vehicles a panacea to our car culture woes?  No.  But it is a mistake to call vehicle electrification a house of cards based on a back-of-the-envelope calculation.

DISCLOSURE: None.



was posted on AltEnergyStocks.com.


       

advertise here


Oil and Gas





Comments

I don't disagree with much that you've said, but the idea of V2G applications is wildly overhyped because (a) the market for so-called ancillary services is small enough that the President's oft stated goal of a million plug-in goal alone could flood the market with 5 to 10 times the FR capacity it needs and drive prices into the dirt; (b) every cycle on a battery reduces it's utility for other purposes like powering the car; and (c) most users will be reluctant to play the grid support lottery where their local utility has the power to decide how much energy is in their battery at quitting time.

I agree that V2G is wildly overhyped, because of your points (a) and (c), and also the fact I pointed out that we simply don't have the necessary structures in place.

As for your point (b), frequency regulation could be accomplished simply by moderating the rate of charging- no discharge necessary. This service comes only at a cost of slower charge time, which is actually good for the battery. There are some types of grid services which will wear out the batteries, as you point out, but if those are higher uses and the owner is adequately compensated, I don't see a problem.

Thanks, Tom, for filling some of the holes in Mr. Petersen's piece. While you quite reasonably focus on the private rationales for the EV buyer, the broader question raised by Mr. Petersen is, why should the federal (and some state) government subsidize EVs? After all, he computes that the value of these subsidizes amounts to $72 of the $190 dollars, leaving just a private gap of $122/barrel premium for the EV -- and that could well be a sensible purchase all on its own, depending on one's view of future oil prices and (as you point out) on one's personal driving habits.

The rationale for the subsidy, however, lies not with the direct economic cost of oil, but with the secondary effects of the US's continued dependence on foreign oil, which:
1. Hurts our trade balance
2. Leads us to rely on trading partners with very questionable policies, forcing the US to compromise on diplomatic issues
3. Leads into expensive wars and security crises (Straits of Hormuz being the flavor of the month)
4. Generates air and sound pollution broadly (whereas power plants can be better controlled and better isolated)
5. Forecloses options for curbing air emissions by continuing investment in a transportation fleet that is entirely dependent on a high-carbon fuel.

The role of government policy is to steer the economy in directions that market prices alone do not achieve. While Mr. Petersen may not believe that any of the above policy goals are worth the cost, he is (fortunately, IMO) not a policymaker.

Progressive governments like Estonia's see the clear benefit in providing modest support to foster an entirely new way of approaching personal transportation. Estonia's investment in a substantial network of DC and AC charging points is a clear demonstration that EVs are not "a house of cards."

Robert,
I agree with you that you have outlined the case for federal subsidy well.

However, I chose not to focus on these because I agree with John that Federal EV subsidies are not money well spent. It's not that the benefits you cite above do not exist, but that there are many better ways to spend Federal money to achieve the same goals.

EVs are typically bought by the well-off, and so federal subsidies for EVs are regressive. There are also better ways to reduce gasoline use and produce all the societal benefits you cite with fewer federal dollars.

Federal subsidies should focus on improving alternative transportation options such as mass transit and cycling and walking options, since all these alternatives reduce oil use by more per dollar spent than do EVs, and they are all progressive subsidies, delivering the greatest benefit to the less well off. Which is, of course, why they are less popular with special interests than are EV subsidies.

If you want to electrify transportation, spend the money on electric commuter trains, buses, and ebikes. As we've both argued above, EV buyers already get a decent deal without subsidies.

If we were to place 1 million electric vehicles on the road, this would reduce gasoline and diesel consumption by about 0.2%, and placing 20 million of them on the road would reduce gasoline and diesel consumption by about 4%. Neither of these scenarios would have a significant impact on oil consumption or the associated problems, such as trade imbalance or distortion of foreign policy.

It is as irresponsible to represent that promoting the purchase of EV's will address the problems represented by oil consumption as it is for an unscrupulous dermatologist to feign treating skin cancer by applying hand lotion and a band aid, leading the unknowing patient that he is receiving effective treatment when he is not. It is worse than doing nothing, as it hinders the pursuit of meaningful treatment.

Post a comment

(If you haven't left a comment here before, you may need to be approved by the site owner before your comment will appear. Until then, it won't appear on the entry. Thanks for waiting.)

Featured Companies











Oil and Gas


Search This Site


Subscribe to this Blog

Enter your email address:

Delivered by FeedBurner


Subscribe by RSS Feed



Twitter Headlines

Certifications and Site Mentions


New York Times

Wall Street Journal





USA Today

Forbes

The Scientist

USA Today

Seeking Alpha Certified

Twitter Updates