Why Electric Cars Don’t Make Financial Sense

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.
honda fit ev

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.
2012 honda fit specs

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?

 

 

37 comments to Why Electric Cars Don’t Make Financial Sense

  • Anon

    Point of these cars is to save the planet, the low MPG is a bonus.

  • I’ve always wondered what happens when totally electric cars take over the planet. I mean, the cars still have wheel bearings, suspension joints, etc that require grease for lubrication. If all the oil companies are gone, who will make the grease? Also the R-134a freon in the a/c system and the tires are made from oil.

    • Mich

      That shouldn’t be a problem at all, after all you’d still have very low cost conventional production going for everything else that requires oil.

  • Not every car will fit every driver. So EVs would make sense for the significant minority of drivers who commute in city traffic every day, have a 2nd car in the household for occasional trips, etc. Plus your fuel costs are low/static: lots of people poo-pooed on hybrids when they first came out because of similar math, then wowzah, next thing they know gas is up 50% and everybody’s clamouring to buy one. If you expect gas to get more expensive in the future, it starts making sense quick.

    Finally, don’t forget maintenance (EVs don’t need oil changes, timing belts, etc.), and that if you have any care for a quieter, cleaner ride, then as long as it breaks even at all in the expected lifetime of the car, you’re doing pretty good.

    • Mich

      Potato, I agree with you that this car may be suitable for certain types of drivers. I am not poopooing on EV tech at all, this is simply a scenario where I would prefer investing the $12,000 rather than putting it on the car in order to enjoy skipping the gas station.

      I should have mentioned specifically that for a money concious buyer it does not make sense to buy one contrary to an environmentally concious driver. Not yet anyway…

  • The old will become new again. Electric cars are a hundred year old idea that’s been dusted off and repacked as a cure for global warming. They still don’t make economic sense, and what about all that fossil fuel required to make the electricity for the limited charge the batteries can hold, and what about the bio-hazard of battery disposal when they wear out or malfunction?

  • I love the breakdown and the comparison. I love the concept of an electric car and the environmental purpose behind it but it’s going to take awhile before it really catches on. There aren’t enough environmentally conscious people to justify the product (or at least not enough that are going to pay $20k to “help the planet”).

  • Great post.

    I think EVs make sense for some folks who have little distance to travel and more importantly, it’s an occassional car for them.

    For everyday use, get a fuel-efficient gas car.

    The battery issue is a wildcard for me. I’d like to see a few “generations” of these cars and see how things go; how replacement batteries work out, how much they cost, maintenance, etc.

    I think we’re a good 10 years away, but EVs could be mainstream by 2022.

    Mark

    • Mich

      Having an EV as an occasional car implies one can afford to buy and maintain 2 or more cars. In that case, money is not an issue at all.

      I think you’re right with your timing, EVs will enjoy much more popularity in a decade.

      Cheers,

  • Yeah I couldn’t justify buying an electric car at this stage of the game. The environmental impact difference is negligible and the price just doesn’t make financial sense. There just aren’t enough charging stations either. That alone makes the decision pretty easy for lots of people.

  • [...] Beating The Index had an informative post about why electric cars don’t make financial sense, at least not yet. [...]

  • If all you will consider is the total price of the car then please write posts about how luxury cars don’t make financial sense as well. They get you to your location in the same amount of time as a low-end one. Amazingly people do take more into account than just the financial aspect.

    • Mich

      Miio, you have a good point, I should have mentioned that the above applies on someone who is looking for the best bang for his buck and not people who can afford to fork out money on luxury cars.

    • I agree with Miiockm.

      If you compare an econobox to an EV, one costs almost twice as much as the other. However, if you compare a Tesla Model S with a Mercedes, Lexus, BMW or Cadilac, they cost about the same. Then, you get a completely different outcome in the cost comparison.

      I am dying to own an EV, but they are still too expensive. Of all the models I have seen, I like the BMW i3 the most. Like the Tesla, it is built from the ground up to be an EV. Other EV models are just converted guzzlers.

      Once the technology matures, the range improves and the cost comes down, EVs will be more attractive to the masses.

  • Mich,

    Electric cars are often presented as the “environmentally responsible” choice, as if you’re choosing money or the environment, but this is a false dichotomy. After accounting for where the electricity gets generated, the extra resource costs that go into production and disposal of the batteries, plus replacement batteries down the road, an electric car can very well end up more polluting than the gas-guzzling equivalent!

    I think one can make more of an impact by reducing their commute length, using the car less and their own legs more, reducing the strength of the AC at home, etc…

    Electric cars will have their day, but solar power and battery tech both need to improve somewhat more.

  • [...] Why Electric Cars Don’t Make Financial Sense [...]

  • [...] presents Why Electric Cars Don’t Make Financial Sense posted at [...]

  • [...] presents Why Electric Cars Don’t Make Financial Sense posted [...]

  • [...] presents Why Electric Cars Don’t Make Financial Sense posted at BeatingTheIndex, saying, “We are years away from seeing EV technology capture high [...]

  • [...] @ BeatingTheIndex writes Why Electric Cars Don’t Make Financial Sense – We are years away from seeing EV technology capture high market share because it still [...]

  • [...] Here’s a guy (I assume) who dabbles in oil securities, writing at Beat the Index. He does the numbers for electric cars and concludes, not unsurprisingly, that they don’t yet make great financial sense for most [...]

  • NotATreeHugger

    It amazes me how many people are trying so hard to convince everyone NOT to buy EVs (electric vehicles) or Hybrids. The bottom line is that this country has major financial and environmental problems. Oil is a large percentage of the reason for both, as well as for the deaths of many thousands of our service men and women.

    EVs and Hybrids are the best opportunity we have at the moment to reduce that dependency on oil, but they are significantly more expensive. The trick to fixing that is to get people to buy enough at the high initial prices to build efficiencies and allow the costs to start coming down.
    The government is trying to help with this through the incentives ($7,500 federal and $6,000 Colorado this year. possibly going up next yr.). 

    Some politicians are trying to turn people away from these cars (as are those that make money from oil) to stop the success. Is this just to stop one party from claiming success. If so, Wow, an excellent example of how the political parties and process are broken. They are willing to derail a potential huge success, for political gain.

    I owned a 2005 Prius, and no mater how many ‘experts’ claim that the high MPG numbers for the Prius are not true – I consistently got 51 MPG (48 in the coldest part of the winter).

    Take a look at the current data on the Volt, this is actual data recorded by the cars systems and relayed to GM by On-Star, automatically.
    http://www.voltstats.net
    Once it comes up, click on the MPG column heading twice, to sort by MPG, and check out the numbers.
    The numbers are so high for some (as high as 4,640 MPG) because some people drive only enough miles per day to stay within the EV range of the vehicle, so little gas use).

    Now imagine what would happen to our oil imports (and how many billions of dollars/day we would stop sending to the middle east) if everyone drove these.

    But we have to continue to support the technology through incentives until the price comes down.

    • Mich

      No one is trying to convince anyone to buy or not to buy EVs. If you are looking for the best bang for your buck, an EV is not for you. It’s that simple.

      If you have money to spend regardless of value, then an EV makes sense as much as the conventional luxury car in the same price range.

      The technology will dominate one day, just not today and I prefer you spend your own money and experiment with the teething problems of early generations before I get to spend mine.

      Cheers,

      • NotATreeHugger

        I wish that were true. Just search the web and listen to talk radio.
        I do agree with you that the day will come when the technology will dominate.
        As a country we need to support it and accelerate as much as possible.

        • Mich

          NOtATH, it is inevitable, the technology will have its day and it might be sooner than we think.

          If you can support it, go ahead,I’ll support it when it makes more sense for my wallet.

          Until then, we each have variable manoeuvring grounds in our budgets.

          Cheers,

  • [...] interesting article over at Beating the Index compares the cost of a Honda Fit electric vehicle with a Honda Fit gas powered vehicle of the same [...]

  • natureboy

    They need to make urine powered cars!
    Good for the environment and we can all produce our own fuel!

  • JT

    This calculation completely ignores the cost of maintaining these vehicles. Because EVs do not have nearly as many internal moving parts as an internal combustion engine, there are far fewer parts that can/will break. This amounts to a big difference in running costs, especially after the first years.

    • Mich

      Sure JT, but then we haven’t discussed teething problems of the first generation of EVs, the fuel tax and the impact of government subsidies taken away…makes a lot of difference.

  • Ron

    I am leasing a Nissan Leaf. So, there is no issue with the batteries wearing out or having to replace them. In 3 years, I return it to Nissan. It costs about the same for the lease as any other medium-priced car because they were offering good deals on the 2012 Leaf before they came out with the 2013.

    And I have zero gas expense. And zero repair and maintenance expense. No maintenance hardly at all. No oil changes. Check fluids and wiper blades.

    I save already compared to the car I had before that was costing me about $200/month in gas and then every year about $1200 in repairs and maintenance. And there is zero risk that I will be hit with a big repair bill. My payment is exactly the same every month, so it’s easy to budget for, as compared to suddenly having to cough up $1,000 for some repair.

    It is a very nice car also. Range is an issue. It’s just for around town. Can’t take it on trips. But if you have another car or fly anyway when you go out of town, it is a very economical solution.

Leave a Reply

  

  

  

You can use these HTML tags

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>