For someone with a concentrated portfolio in the oil and gas sector, I need to stay plugged in (pun intended) to the transportation market. After all, it accounts for 70% of oil demand. While I expect EV technology to become predominant in the future, it seems we are still years away from seeing this technology command a meaningful market share. The reason is simple; it still doesn’t make financial sense to buy an electric car because of ROI (return on investment).
In 2011, about 17,300 plug-in hybrid and electric cars were sold in the United State out of 12.8 million new light duty cars. That represents a puny 0.1% of the market. This year, 10,000 EVs were sold through May, that’s still less than 0.2% of car sales. What is wrong with that picture?
Here’s the thing, unless you’re a “conscious environmentalist” buying it to save a tree, you’d want to buy the car because it saves you money on gas. Does it make financial sense to buy an EV? The short answer is NO. Let’s take the Honda Fit for a ride as the exact same car comes in 2 versions:
2013 Honda FIT EV MSRP $36,625
- Best in class EPA rating of 118 MPG
- Price tag cheaper than GM Volt at $41,000
- This EV uses 29 KWH of electricity per 100 miles. Using the national electricity rate of $0.12 per kilowatt Hour and an annual average of 15,000 miles your expense comes out to $522.
2012 Gas Powered Honda Fit. MSRP $17,080
- 4 Cyl, 1.5 L, Automatic, DX-A version ie not the cheapest model.
- Based on a 30 MPG EPA rating, the car requires 3.33 gallons to drive 100 miles. Using the annual average of 15,000 miles per driver and $3.50 per gallon (national gas average slipped below $3.50 thanks to lower oil prices) the total cost comes out to $1750.
At first sight, the annual savings of $1,228 look great! ($1,750 – $522) but let’s take a closer look given you bought the car:
$36,625 – $7500 = $29,125 vs $17,080 for a difference of $12,045
In order to break even on your car, you need $12,045/$1,228=9.8 years
That’s 10 years for you, a long payback period. What happens after 10 years if you have to change the batteries? You just lost some of the money you saved on gas! But on the other hand, what happens if you dump $12,000 into a dividend paying ETF for 10 years? You can easily earn a 3% dividend on that! Your $12,000 would be worth more than $16,000 and that’s assuming you only reinvested your dividends with NO CAPITAL GAINS. Between these 2 similar cars, would average Joe still buy the EV? I guess not unless Joe is either a tree hugger or doesn’t know how to use a calculator.
There has been some lofty goals for EVs, Obama for example would have liked to see 1,000,000 electric cars on the road by 2015. It looks like he will be lucky if he gets the 300,000 figure.The car is expensive EVEN after the lofty subsidies. There’s also another point with regards to savings, how much of the $3.50 per gallon that I used is government taxes? The figures point to a US average of $0.48 per gallon in state and federal taxes and right now EV drivers are not paying any equivalent.
Nissan estimates that 10% of all car sales will be electric by 2020 which I view as realistic and I personally hope the figure ends up higher. However, I believe many people are watching from the sidelines waiting for cheaper entry points and a wider driving range. Technology is moving so fast some are afraid the EV they buy today will become obsolete in 4 years. Just like a PC, their car would end up with a highly reduced resale value. That’s a risk many people would like to avoid given the long payback period. Having said that, electric cars are the future and what we are witnessing now is a revolution in transportation that will take the time needed to get established.
Would you buy an electric car? What do you think of the scenario above?