Musings on the Motoring World

Economics, not oil, will kill the rise of the electric car

There will be no doubt that those nostalgic for the days when petrol was cheaper than milk and emissions was something that happens unexpectedly while you are asleep, will be ecstatic to hear headlines of oil prices plunging into negative territory. Come May, with the price of West Texas Intermediate crude oil futures falling 321 per cent to -USD37.63 per barrel. A burning barrel of oil will be technically more valuable on the trading floor than one that isn’t.

The gathering storm

Photo by Robin Sommer

The negative pricing is no mere glitch in the system. As Russia and Saudi Arabia play a game of oil price chicken, coupled with falling consumer demand for oil amidst the Coronavirus lockdown, it seems that the market is running out of place to absorb next month’s incoming oil.

That isn’t to say that you would get paid to pump your car at the fuel bowser. Or that fuel will become so cheap that it is literally free. These negative prices pertain to the complicated world of futures trading. The prices are more indicative of the market sentiment and are not a reflection of the actual value of the resource.

On top of that, it is the indicative pricing for one of many crude oil markets in the world. Albeit, a very large and influential one. Crude oil from other regions is still trading between USD20 and 30. Cheap, but certainly not anywhere close to being given away for free. 

Is this the end of the electric car?

Nevertheless, the negative pricing has set off alarm bells as the world enters uncharted territory. Economists and industry analysts are uncertain about what the future holds. The automotive industry, in particular, has been reeling from low consumer demand and idle plants brought on by the pandemic. Now, with oil prices hitting new lows, many are wondering if those massive investments into electric cars will be for naught. 

On the dollar-per-km running cost front, electric cars still come out on top. Even with the metrics tilted in the conventional engined car’s favour with cheap fuel and high electricity rates. That being said, when purchase price and depreciation, two of the chief failings for electric car propositions, are lumped into the equation, fossil-fuelled cars come out ahead. 

The return of cheap oil is often seen as the death knell for the automotive industry’s electric car ambitions. Cheap fuel brings back memories of the good times when engine sizes were measured in cubic inches and the Anglosphere built cars that were the envy of the world. Yes, the fall in fuel prices would bring extremely challenging times for the electric car. But not because everyone will return to the macho embrace of gas-guzzling pick-up trucks and muscle cars.

It is not always about the price of fuel

Photo by Gab Pili

Last month, analysts from UBS believe that the then declining oil prices wouldn’t hinder China and Europe’s electric car sales. They believe that both regions have been working towards building a market that is conducive for electric car users. Adding to that, oil prices have been on a decline long before this worldwide crisis. All the while, sales of electric cars have been climbing.

The rise in electric car adoption has much to do with attractive government incentives and tighter emission regulations. In addition to that, electric cars are now seen by consumers as something aspirational rather than a hipster alternative for sticking it to Big Oil. You can thank Tesla’s antics for that sea change. 

Oil runs the economy

Photo by Aditya Vyas

The crux with the electric car’s future prospects lies with its aspirational quality. Historically, oil prices have served as an indicator of the health of the economy as demand for oil is usually correlated with economic activity. With the negative pricing in the futures market being tied to the decline in economic activity due to the ongoing pandemic, economists are becoming increasingly alarmed for what lies ahead. 

With a potential recession looming, many consumers would be putting off plans for buying a new car. Moreso when it comes to the more aspirational of car choices.

Electric cars are not only more expensive and more exposed to depreciation. Its limited utilitarian capabilities (ie range), as compared to its internal combustion engine counterpart, will dissaude cautious consumers.

Forcing the government’s hand away

Furthermore, with government incentives bolstering electric car sales, such incentives are more than likely to be deemed unnecessary in a downturn. What’s more, is that the expansion of an electric car infrastructure will be a likely casualty of government spending cuts.

The only hope for the fortunes of electric cars at this stage would be for governments to introduce another “cash-for-clunkers” program aimed at low-emissions models to resuscitate a stalling market. However, it would be unlikely for consumers to trade into new all-electric models at a premium over conventional-engined options.

The unstoppable tide of change

Make no mistake, electric cars are here to stay for the foreseeable future. The only question is whether its growth will stagnate over the next few tumultuous years. Even with the most pessimistic scenario for electric car adoption, it’s unlikely the world will return to “the good old days”.

More pertinently, whether you are an adherent to the virtues of the traditional combustion engine or a staunch early-adopter, the immediate future of the electric car is of grave concern for automotive giants like General Motors, the Volkswagen Group, and Mercedes-Benz.

These companies have cast its lot with the electric car and ploughed billions into developing new all-electric models. It would be an unfortunate hill to die on should an economic catastrophe were to hit. And not because some oil traders were as good as giving their oil away for free. 

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