Electric vehicles (EVs) have been slowly gaining traction over the last few years. Some people believe EVs will replace gasoline powered vehicles; others believe they are a fad that will remain marginal players in the transportation system. I am an economist, so I believe that people will follow the money.
EVs as we know them today, are unlikely to take over significant market share anytime soon. They are too expensive, too “greeny,” and too risky for the average consumer. That is why you may hear forecasters wonder if the market for these cars even exists without government subsidies. However, if you understand complexity theory and market evolution, you probably have a slightly different view.
Understanding Technological Adoption
When a consumer is facing a decision on which car to purchase next, there are several factors that drive that decision. Some of them are qualitative, such as the social implications, their personal preferences, and their trust of the brand/system built around the choice. The other factors are quantitative; it’s about the dollars and cents.
Factors to Consider
These qualitative and quantitative factors will weigh against each other as one evaluates their options. If they are a member of Greenpeace and all their friends drive electric cars, they are likely to pay a premium for the low emission vehicle. If they live in an oil state and work for an oil company, they probably wouldn’t pick an electric car even if the price was half a gasoline equivalent.
The point being that money isn’t the only factor. But, as the cost differential spreads, at some point people tip in the other direction. There isn’t one number that creates that tip, it’s different for everyone, so we should expect conversions to slowly progress as the differential expands. Until enough people switch, at which point the conversions will happen quickly.
There is a feedback mechanism at play. In complexity theory, its known as a “cascade.” Basically, as more people make the conversion, it changes the perception and infrastructure around that new technology, enticing more people to also make the switch. This effect is why market penetration tends to take an “S curve” shape, not a straight line.
At first, only early adopters and trend setters make the leap (slow growth phase). Once enough of the new product is in the market place, people begin to see it more often and receive a social cue that the product is fashionable. The followers begin to adopt it as well, driving up the frequency it is seen by others, which in turn promotes even more adoption (exponential growth phase). Eventually, the market saturation gets high enough that there is little room for further growth (stabilization phase).
The question is what will create the tip. the most likely cause will be the cost differences between an electric, and gasoline vehicle (hybrid vehicles are likely to fall in the middle and are currently either playing a role as a transition vehicle, or represent where we are heading). If electric vehicles are truly the car of the future, they must begin by being more economical than gasoline cars. I talked in a previous post about the cost of a gasoline powered vehicle, basically deriving a ballpark estimate of $8,000 per year to own such a car at current utilization rates.
As I explained, it is very possible that the direction of future transportation will be to use fewer vehicles to do the same amount of driving (or more). The result will be that each vehicle will cost more to drive each year. At some point, the combination of cheaper cars, lower fuel costs, and lower maintenance costs will likely cause the market to tip in the direction of EVs, unless ICEs can keep pace. If that occurs, the conversion rates will far outpace any model that assumes linear growth.
There are basically 3 costs to consider when comparing an EV and internal combustion engine (ICE); the vehicle cost, the fuel cost, and the maintenance costs.
Vehicle cost has historically favored the ICE. This is primary due to two reasons. First, the manufacturing machine that produces ICEs takes advantage of economies of scale. The much lower market for EVs implies that the manufacturing costs have not taken full advantage of efficiencies quite yet. The other reason is due to the cost of batteries to power EVs. This technology is still in its maturation phase, finding ways to improve the product now that the proof of concept is complete. Both of these factors imply that the initial cost differential between an ICE and EV will narrow, or possible flip in the near future.
Fuel efficiency currently favors the EV. The cost of electricity at $0.10 per kWh translates to a driving cost of roughly $0.04 per mile. Meanwhile, a cost of gasoline at $3.00 per gallon in a car that gets 30 miles per gallon translates to $0.10 per mile.
This 6 cents per mile spread implies that an electric car is worth about $60 per month in fuel cost savings at current levels of driving. Therefore, the consumer would want to ensure their monthly car payment is no more than $60 per month more expensive for the EV vs. the ICE.
This number changes if any of the variables change. This implies that conversion will accelerate if the cost of gasoline increases, if the cost of electricity decreases, or if the average vehicle starts driving more miles.
Probably the biggest and most underappreciated advantage of an EV over an ICE is the cost of maintenance. An electric engine requires no lubrication, generates no friction, and requires no fuel delivery system. Therefore, there is no oil to change, no belts, no seals, no filters, no starters, no carburetors, no exhaust manifold, and none of the many other components of a combustion engine. This also means that those components cannot break and need repaired.
All this maintenance represents about $400 per year at today’s usage. If each car is suddenly driving 10 times as many miles each year (thanks to autonomous driving), then an EV will represent around $4,000 per year of reduced maintenance over an ICE. And, the electric engine will easily last over 400,000 miles versus the less than 100,000 miles an average ICE currently lasts until the repair bills add up to more than the cost of replacing the car.
While I don’t see a dramatic shift happening soon, many factors seem to be pointing in the direction of a mass conversion to electric vehicles in the future. The reduction in vehicle costs, the lower cost of fuel, and the cheaper maintenance costs are all economically advantageous to the EV owner. As these economic forces move more people toward electric vehicles, the social proof will encourage increasingly more conversions.
It is likely that these conversions will not grow in a linear fashion as many models predict. It is more likely that a tipping point will be reached followed by a mass conversion, following an exponential growth path. This tipping point can occur by any combination of social acceptance, increased oil prices, decreased battery costs, improved charging infrastructure, and the acceptance of autonomous vehicles.
My prediction is that we are still several years away from that tipping point, but we are inching closer every day. The implications on the energy sector will be profound, as reduced demand for gasoline will push down on prices. And, because a high oil price can accelerate its demise, there is significant reason for oil-producing countries to hold down prices from here forward.