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Why The Electric Vehicle House of Cards Must Fall

John Petersen

A few days ago Alex Planes published an extraordinary article on The Motley Fool titled the "Real Costs of Alternative Energy" that summarized direct US subsidies for our principal energy sources, restated annual energy consumption from each of those sources using equivalent barrels of oil as a standard measure, and calculated the direct Federal subsidy per unit of useful energy consumed. The following table condenses and reorders the data from the lowest to the highest direct Federal subsidy per unit of useful energy consumed.

1.8.11 US Subsidies.png

As I pondered Mr. Planes' work and methodology, the first question in my mind was "How would electric drive stack up using the same methodology?" Today I'll share my answer to that question.

Since the primary goal of electric drive is to reduce gasoline consumption, it seems reasonable to treat fuel savings as equivalent to oil production. On a thermal equivalency basis, 50.4 gallons of gasoline have the same BTU value as one barrel of crude oil. Since gasoline is a refined product while crude oil isn't, we need to adjust the equivalency factor for the energy used in refining and distribution. When we include all costs of refining and distribution, not burning 40.5 gallons of gasoline is the functional equivalent of producing one barrel of oil.

A CAFE compliant new car will offer an average fuel economy of 33.3 mpg while a CAFE compliant new light truck will offer an average fuel economy of 25.4 mpg. The combined fleet standard is 29.7 mpg. To keep things simple I'll round that figure up to 30 mpg. At 30 mpg, the owner of a new light duty vehicle will consume about 420 gallons of gas per year, or 4,200 gallons over the course of a decade. That's the equivalent of 10.4 barrels a year or 104 barrels of over the course of a decade.

Now comes the fun part!

In a recent analytical report titled "Global Autos: Don't Believe the Hype – Analyzing the Costs & Potential of Fuel-Efficient Technology," Bernstein Research and Ricardo PLC performed a bottom-up cost walk analysis that started with a $19,000 gasoline powered vehicle, deducted the costs of unnecessary internal combustion drivetrain components and then added the incremental costs of necessary electric drivetrain components. The end result of this bottom up cost walk analysis was a $38,800 electric vehicle. The following graphic summarizes the Bernstein-Ricardo cost walk.

1.8.11 Cost Walk.png

I've previously shown how an electric vehicle will save the average driver 104 barrels of oil over the course of a decade. When you turn the crank on the incremental cost of vehicle electrification, it works out to an up-front capital investment of $190 for each equivalent barrel of oil saved. It's like Milo Minderbinder's scheme to buy eggs for a dime, sell them for a nickel and make up the difference on volume.

If we forget about the immense capital costs and focus exclusively on the direct Federal subsidy per barrel of oil saved, it works out to $72.11 without including any State, local or indirect incentives.

The ultimate obscenity is that a conversion from gasoline drive to electric drive will not reduce the total amount of energy used in transportation. It merely shifts the energy burden from lightly subsidized oil and gas to more heavily subsidized energy from coal, nuclear and renewables.

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.

The law of economic gravity cannot be ignored and will not be mocked. Shiny new electric vehicles from General Motors (GM), Ford (F), Nissan (NSANF.PK), Toyota (TM), Tesla Motors (TSLA) and a host of privately held wannabe's like Fisker Motors and Koda are doomed to catastrophic failure. Their component suppliers will fare no better. There is no amount of political or wishful thinking that can change the inevitable outcome.

Disclosure: None.

was posted on AltEnergyStocks.com.

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I got this comment via email from reader -TK

Electric cars are they conserving energy? Rev2

Note: Electricity is a secondary form of energy derived by utilizing another form of energy to produce electric current.

Let us look at the facts:

In order to produce electricity, we need some form of energy to generate electricity, whereby you lose a substantial amount of your original source of energy.
In the process we are losing the efficiency of the initial energy source, since it is not a direct use of the energy.

Let us take it a step further. To generate electricity we utilize; coal, oil, natural gas, nuclear, hydro electric - water, photovoltaic-solar, wind, geothermal, etc. Many electricity generating plants utilize fossil fuel, which creates pollution.

How much of the initial source of energy do you lose to get the electricity you need for your electric automobile; you also lose electricity in the transmission lines.
Why are we jumping to a new technology, without analyzing the economic cost, the effective return and efficiency of such technology; while computing and measuring its affect on the environment?

Natural gas vehicles are a direct source of energy, where you get the most for your energy source – in efficiency and monetary value.

In these hard economic times – I would think, you would want to get the most for your dollar – and not waste resources.

Another economic impact would be the loss road tax on fuel, these funds are used to build and maintain the highway infrastructure

YJ Draiman, Director of Utilities & Sustainability

“It is Cheaper to Save Energy than Make Energy”

I enjoyed this article. The very high price of oil when oil was discovered didn't prevent the introduction of oil (gasoline) powered vehicles. Likewise the very high price of electric cars won't prevent their introduction.

While Mr Planes is right in that it makes more sense to compare subsidies per energy produced than the ablolute level of subsidies, his and your calculations are flawed because of timing.

The energy production you buy with a subsidy sometime comes after the subsidy is spent sometimes it is concurrent.

For subsidies like the Wind Production tax credit, where energy produced is directly subsidised, his calculations make sense. But when it comes to subsidies like the ITC and accelerated depreciation, the subsidy is paid up front, but the energy is produced of many years following. Especially when you have a rapidly growing industry such as solar, this will artificially make the subsidy per BOEe look artificially high. With a declining industry like oil, much production today is the result of subsidies paid in the past, making the absolute value of the subsidy per BOEe look artificially low.

Planes has just traded one flawed methodology which happens to make O&G look bad, for another flawed methodology which happens to make O&G look good.

I think your calculation on subsidy per oil saved is far superior to Mr. Planes methodology, but I agree with the earlier commenter that there are many externalities of gasoline production which are not being included in the costs.

All the ITC and accelerated depreciation in the world can't come close to offsetting the 100 to 1 disparity between the subsidy value of an oil and gas BOE and a wind and solar BOE.

Your criticism may in fact have merit. Perhaps the costs could be refined a little better to satisfy academicians. But the incremental accuracy would't change the analytical paradigm and the extra detail would be superfluous.

@ comentor D:

You make the point that electricity is derived from a primary energy source. You have to expend energy to create electricity. Great point well taken.

One cannot pour crude oil directly into a fuel tank of either a gasoline or diesel vehicle. It has to go through a process called refining. Refineries typically have huge on site electrical generation plants to provide the energy to refine oil into it's final products, like gasoline.

So if electricity is to be considered a secondary energy source, then gasoline is a tertiary energy source due to fact you need electric to refine the stuff. Why not feed that electricity directly into a BEV and skip a step?

Plenty of electricity is lost in the high voltage transmission lines. I've heard estimates of up to 50%. Solar at the point of consumption (ie your house) is clearly the most direct and efficient method to generate usable energy in the form of electricity.

While PV solar costs have shrunk enormously in recent years they still have a way to go to make them competitive against the alternatives. Once the economies of scale are reached, then solar+BEV is the future of personal energy and transportation.

I don't have easy access to the data for all of the Vehicle Cost Walk analysis but a quick check reveals significant errors. All over the internet (e.g., ,here and here) current prices to OEMs of lithium ion battery packs are quoted at $450/kWH in volume.

But using this source seems reasonable - they use actual costs of cells to determine a cost of $541/kWH. Let's call it $600. Then the Nissan Leaf's 24 kWH pack would cost $14,400 or about $11,340 euros at current exchange rates. This is almost 18% lower than the 13,800 Euros shown. Battery costs, given the intensive, worldwide R & D efforts, will certainly drop.

The cost walk came from Bernstein Research and Ricardo PLC. Take a look at their websites and then get back to me with you assessment of the more credible source.

Reporters talk about happy talk promises. Bernstein and Ricardo talk about current auto industry fact.

Future battery cost reductions will be on the order of 5% a year, which is what they've always been.

I think the timing issue CAN account for most of the 100:1 disparity between solar and O&G subsidies.

Because a solar farm produces for 30+ years, and the average solar farm is probably only about 2 years old (due to the rapid growth of the industry), solar subsidies are probably overstated by a factor of about 15.

For O&G the opposite is true. We've had 150 years to develop an O&G industry, with a massive infrastructure in place, much of which benefited from subsidies when it was built, but which is still benefiting the O&G industry today. If all these legacy subsidies simply understate the subsidies to O&G by a factor of 7, then we have a 105x miscalculation when comparing solar subsidies to oil subsidies.

I have no particular desire to defend or criticize Mr. Plants' numbers and methodology. Your observation about front loading of subsidies and back loading of benefits may in fact eliminate much of the disparity with solar, but since solar isn't my thing I'm unwilling to go down that rabbit hole.

Regardless of how the solar question shakes out, the up-front capital investment for electric drive is $190 for each barrel of avoided future oil consumption. Likewise, the up-front subsidies are $72 for each barrel of avoided future oil consumption.

The costs are all front loaded and the benefits are all back loaded, but even if the benefits could be front loaded the economics wouldn't make a bit of sense.

Regarding the battery pricing with which you disagree from the EVs Roll site - you DO realize these are actual costs for currently available batteries, right?

I've seen the Thundersky price list before. It may be interesting for the DIY crowd but unless you're investing in Thundersky or an automaker that uses their batteries it's also irrelevant.

So you're of the opinion that the availability of Li ion batteries at $541/kWh is irrelevant to the incremental cost of manufacturing an EV? That's certainly a fascinating position.

Cell cost is typically 60% to 70% of pack cost and products from Thundersky are not of the same quality demanded by first tier manufacturers, so unless you want to do a DIY job their pricing is irrelevant.

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