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Can $5 gas sell a million electric cars?

By Claes Bell, CFA · Bankrate.com
Saturday, April 30, 2011
Posted: 6 am ET

Projections about the adoption of all-electric cars vary wildly depending on who you talk to. In his State of the Union address, President Barack Obama set a goal of having 1 million electric cars on American roads by 2015. But not everyone is so sanguine about the prospects for the penetration of all-electric cars into the U.S. market.

Barely a month after Obama's speech, a panel at Indiana University threw cold water on that prediction, citing production limitations and uncertain consumer demand as potential obstacles. From the panel's report:

The production intentions of automakers are currently insufficient to meet the 2015 goal, and even the current plans for production volume may not be met. Automakers could ramp up PEV production if consumer demand proves to be larger than expected. However, consumer demand for PEVs is quite uncertain and, barring another global spike in oil prices, may be limited to a minor percentage of new vehicle purchasers (e.g., early technology adopters and relatively affluent urban consumers interested in a "green" commuter car).

Nissan LEAF

The Obama administration hopes Americans will buy a million electric cars like the Nissan LEAF by 2015.

J.D. Power piled on this week, releasing a study questioning whether U.S. demand for electric cars would ever take off, noting citing a survey they conducted that found most car buyers care far more about cost considerations than environmental impact. From the survey:

Although the environmental benefits of these vehicles are recognized, they are mentioned far less frequently than saving money on fuel. For example, 75 percent of consumers who indicate they would consider a hybrid electric vehicle cite lower fuel costs as a main benefit. In contrast, only 50 percent cite 'better for the environment' as a main benefit of these vehicles.

J.D. Power's conclusion? At current gas prices, electric cars don't have much of a shot in the U.S. market.

"Alternative powertrains face an array of challenges as they attempt to gain widespread acceptance in the market," said Mike VanNieuwkuyk, executive director of global vehicle research at J.D. Power and Associates. "It is the financial issues that most often resonate with consumers, whether it is the higher price of the vehicle itself, the cost to fuel or charge the vehicle, or the fear of higher maintenance costs. The bottom line is that most consumers want to be green, but not if there is a significant personal cost to them."

I expressed similar reservations in a blog a few months ago on the pros and cons of electric cars. But J.D. Power's dismissal of electric cars' economic viability didn't go unchallenged. The Consumer Federation of America released a blistering critique of J.D. Power's study, arguing that rising gas prices and a growing roster of all-electric models make that 1-million mark a foregone conclusion:

This year, average household expenditures for gasoline are projected to exceed $2,800, which would represent the largest annual expenditure ever. "We're spending as much to drive our cars as we do for all the energy needed to run our homes," said Dr. Mark Cooper, Director of Research, CFA.

"Adopting new technologies and improving the fuel economy of passenger vehicles is the best insurance consumers will ever have against rising gasoline prices," said Jack Gillis, CFA Director of Public Affairs and author of "The Car Book."

I'm not sure whether electric vehicles will hit that 1 million mark by 2015. I have some sympathy for the CFA position, and as someone that lives and works but a few feet above sea level and fears the effects of global warming, I understand the environmental benefits of electric cars. But J.D. Power is right in that most people, by necessity, have to put cost above environmental impact on an individual basis. Most people just can't afford to pay $25,000, $30,000 or even more for a compact or subcompact car that may or may not be able to accomplish the hauling tasks they face on a daily basis because of size and range limitations.

On the other hand, I think the J.D. Power analysis underestimates the psychological impact of gas prices possibly surpassing $5 per gallon this summer. Studies have consistently shown car buyers massively overreact to the price of gasoline, happily ponying up for hybrids and other fuel-efficient vehicles over a relatively minor rise in fuel costs, and immediately trading them in for massive SUVs and sedans when fuel prices drop.

Bankrate readers and others in the frugal community may run the numbers on whether electric cars are worth the money in financial terms, but for a lot of people, buying a car is more of an emotional decision than an analytical one. Faced with gas prices of $5 and climbing, I think a lot more people than they probably make sense for will buy all-electric cars. In my experience, people have a way of affording things when they're in a panic. One thing I feel sure about is if by 2015, there are a million all-electric cars tooling around America's roads, fear over fuel costs rather than environmental concerns will likely be the reason why.

What do you think? Will Americans embrace electric cars enough to meet that 1 million-car goal by 2015? Would you buy one?

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8 Comments
Homeless
May 02, 2011 at 7:40 am

@ BOTH Jamie and Mike, well said!

Most people can barely afford the cars in their driveway and credit is limited. The initial costs of an electric vehicle are prohibitive for the average consumer.

Like Jamie my commute makes an electric vehicle unviable for me. I drive 45 miles eac way, bc I can only afford to live in the suburbs but all the jobs in my field are in Atlanta. I would love to drive an alternative fuel vehicle (I would get to drive in the HOV lane!!) but from my research, I would not be able to finance one and it would not last long enough. While each trip in theory should take 45 minutes, due to traffic it's actually 1 & 1/2 hours each way (minimum). A lot of time is spent idling.

What we need to invest in are more viable mass transit options. I have to drive 20 miles before I can even pick up a train to my destination (not to mention the train system in GA is rife with gang activity and can be very dangerous). This makes zero sense logistically, not to mention I have two small children in daycare and if the transit system isn't running all day, I would have difficulty getting to them in an emergency. The reason the citizens wouldn't allow for the trains to move into the suburbs is bc of above mentioned violence! Consistency, security and convenience would go a long way to help commuters, the environment and the government. However, we our government keeps "investing" in the wrong things.

Mike
April 30, 2011 at 7:49 pm

The price of gas isn't going up, it's inflation as the fed is printing money like mad destroying the dollar. Our president wants to do an investigation into OPEC???? Our current gas prices has very little to do with OPEC. He's going to try keep the wool pulled over the American peoples eye's until he gets reelected so he can continue destroying our country.

Jamie
April 30, 2011 at 9:11 am

No, I wouldn't buy one. I saved my money until 2008 and bought a Subaru Outback, why? Because it serves my needs perfectly. It holds an often hefty load and is able to make it over the mountain passes I must drive frequently. From both speaking with mechanical engineers and those who have driven electric cars I can tell you that one, as they are now, would not meet my transportation needs. That and I've already poured enough money into my Subaru Outback that it would be an absolute net loss for me to even think about trading in my car for an electric car. I'm already cutting severely on grocery items I used to enjoy and am wearing 3 blankets when I'd just rather turn on the heat. Not to mention that charging a car often would create a rise in my electric bill that I just wouldn't like to see. I have no idea how I will battle the incredible costs of gas seeing as I cannot take a job closer to me because it would result in a pay cut for me. I would like to take my bike to work but that just isn't a reality for me. Perhaps they can work on a program that would aid those who must rely on gasoline at the present time and cannot afford the soaring cost. To think that a million electric cars will be on roads by 2015 is incredibly, almost laughably, naive. Many drivers wouldn't give up their gas guzzler for anything because they like the way it makes them feel when they're driving it. Many are in a similar position to me in that they cannot afford a trade-in and cannot bike to places they need to be. Many drivers have attached a negative stigma to electric and hybrid cars and their owners. As I have found out about most of the current administration's prospects, this is a nice warm, fuzzy thought and very ideal but not at all what is actually going to happen for us who are actually unable to meet all of our needs financially. Last time I checked no one in the current Obama administration has even sweat a bead at the thought of not being able to get to work because of gas cost. Last time I checked the Obama administration has not even taken steps to set an example of this projection they predict will happen. I have yet to see Obama arrive in an electric car brigade. If electric cars are so wonderful and a viable option then why haven't those pushing for it so hard embraced it. Perhaps it is because they aren't exactly a replacement or viable option after all. The day I see Obama replace military vehicles with electric versions is the day I'll start to consider and electric car an actual replacement option that meets car owners driving needs..

Jamie
April 30, 2011 at 9:11 am

No, I wouldn't buy one. I saved my money until 2008 and bought a Subaru Outback, why? Because it serves my needs perfectly. It holds an often hefty load and is able to make it over the mountain passes I must drive frequently. From both speaking with mechanical engineers and those who have driven electric cars I can tell you that one, as they are now, would not meet my transportation needs. That and I've already poured enough money into my Subaru Outback that it would be an absolute net loss for me to even think about trading in my car for an electric car. I'm already cutting severely on grocery items I used to enjoy and am wearing 3 blankets when I'd just rather turn on the heat. Not to mention that charging a car often would create a rise in my electric bill that I just wouldn't like to see. I have no idea how I will battle the incredible costs of gas seeing as I cannot take a job closer to me because it would result in a pay cut for me. I would like to take my bike to work but that just isn't a reality for me. Perhaps they can work on a program that would aid those who must rely on gasoline at the present time and cannot afford the soaring cost. To think that a million electric cars will be on roads by 2015 is incredibly, almost laughably, naive. Many drivers wouldn't give up their gas guzzler for anything because they like the way it makes them feel when they're driving it. Many are in a similar position to me in that they cannot afford a trade-in and cannot bike to places they need to be. Many drivers have attached a negative stigma to electric and hybrid cars and their owners. As I have found out about most of the current administration's prospects, this is a nice warm, fuzzy thought and very ideal but not at all what is actually going to happen for us who are actually unable to meet all of our needs financially. Last time I checked no one in the current Obama administration has even sweat a bead at the thought of not being able to get to work because of gas cost. Last time I checked the Obama administration has not even taken steps to set an example of this projection they predict will happen. I have yet to see Obama arrive in an electric car brigade. If electric cars are so wonderful and a viable option then why haven't those pushing for it so hard embraced it. Perhaps it is because they aren't exactly a replacement or viable option after all. The day I see Obama replace military vehicles with electric versions is the day I'll start to consider and electric car an actual replacement option that meets car owners driving needs.