Wednesday, April 06, 2011

The Economics of Electric Vehicles

Margo Thorning's editorial in an edition of last month's Wall Street Journal, entitled Pull the Plug on Electric Car Subsidies, assembled a useful set of data concerning the economics of electric vehicles.

Going back to 1832, Ms. Thorning noted the invention of the first electric car in Scotland by Robert Anderson. She mentions the first American electric vehicle making its appearance in 1907, then writes,

"Since that time Americans have seen tremendous innovations in everything from air travel to microwaves, yet there has been little progress converting consumers to vehicles powered by rechargeable batteries."

She begins by quoting Consumer Reports reviews which trashed Chevy's Volt as inefficient as both an electric and gasoline car. In terms of cost, she reveals that the Nisan Leaf's battery costs $20,000, yet still only provides an 80-mile range under optimal, which is to say, temperate weather conditions. Drive it in hot or cold weather, and that range shrinks dramatically. The charging unit for such a vehicle varies between $1-2,000. Of course, using an electric vehicle merely transfers energy usage from gasoline to our mostly coal-fired power grid.

Surprisingly, Thorning contends that you'd need $300/bbl oil, along with an electric car battery costing 25% of the current $20,000, to make an electric vehicle cost-competitive.

Thorning then ticks off the various government subsidies to try to sway consumers to buy electrics. There's the $7,500 tax credit, as well as credits for "installing charging stations in homes and businesses and for building battery factories and upgrading the electric grid."

Citing the current administration's goal of one million electric vehicles driven by 2015, she estimates this will result in a $7.5B federal subsidy.

Having read this piece last month, then reading Paul Ryan's editorial in yesterday's Wall Street Journal in support of the House GOP's 2012 budget, I have to wonder whether these subsidies will survive the next two years of federal spending fights.

And, in that environment, with such reliance by Ford, GM, Nissan on federal largess to market these cars, whether those auto makers are due for a nasty surprise, having sunk so much capital into designing and producing electric vehicles.

I saw Alan Mulally show a new Ford Explorer on CNBC's morning program yesterday. The amount of digital technology in a new car, including various remote cameras and warning systems, certainly distinguishes such a car from one that is just five years old. But those systems are hardly so novel as to be a barrier to competition.

That means all the major car makers will be designing and selling better cars with more useful safety/electronics systems without prices for them rising out of control.

So where will the payoff ultimately come for Ford, GM and the other competitors for electric vehicle design and production that ultimately makes no economic sense? Wages aren't rising, and unemployment is still high. Federal spending is now under more scrutiny than at any time that I can recall in my life.

With Thorning's informative editorial as evidence, does anyone really think the money being poured into electric vehicles is actually going to make an adequate return for these firms any time soon?

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