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.
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.