The Electric Car Market

This article found in the September issue of The Economist titled "Plugging Away", discusses the European market for electric cars.  The article specifically mentions a French firm by the name of Groupe Bollore' and their approach to this rising market.  The article discusses how Bollore' has focused it's efforts not on the electric car market itself, but on the management and storage of the energy that will make such cars run.  Bollore' claims to have manufactured a battery that is more powerful and more resistant to external temperatures than the lithium-ion batteries currently being used by electric car manufacturers.  Whether or not Bollore' indeed makes a superior battery is not the imposing question however, the question is where do we think the market for electric cars is heading?

In looking at what the electric car market may or may not do in the future there are many economic factors to consider.  The first and most prominent factor is whether governments will even allow a major transition to electric vehicles.  Just as important is evaluating what the implications would be to the price of oil for existing automobiles that run on gas?  In looking at a supply and demand curve for oil, if you introduce a supplement in the form of electric cars, what can we expect to happen to the curve?  If an affordable option is streamlined and introduced into the market you can expect the demand for oil to shift to the left.  This shift would inherently cause a drop in price for oil.  If on the other hand the electric cars continue to be higher priced than gas powered automobiles we can expect little to no change to the demand for oil.

In examining the demand for oil and the effects of what the pricing of electric cars will do to the demand we can see the risk that Bollore' is taking.  Bollore' is currently spending billions of dollars to push forward the manufacturing and marketing of their new batteries.  If the market for electric cars does not take off as Bollore' is expecting and electric cars do not become more affordable to the public, Bollore' will crumble.  On the other hand, if Bollore' can indeed provide a cost affordable battery for electric cars that is better than the current option and the electric car market does take off and gain significant market share in the automobile market then the billions of dollars spent by Bollore' will have paid off in a very big way.


Dr. Tufte said...

The action really is in the batteries though, and the amount of catching up they need to do to make those batteries viable is ridiculous.

Hmmm ... why would the government stand in the way of a technology that isn't economically viable? It seems to me that they're doing the opposite.

I'm not sure your analysis of oil is correct. There aren't exactly any viable alternatives for electricity generation than coal, oil, and gas. So I tend to doubt you'd see the leftward shift (even if you described it well). :)

Dr. Tufte said...

The electric car market generates a lot of nonsensical economic discussion, so I figured I'd add a primer on the economics of the technology here: not required - just for the curious.

1) Both gas and batteries deliver power on demand. Batteries are much more expensive, both in the short-run and long-run.

2) The costs of battery recycling and disposal are far higher than all the infrastructure that supports a gas powered car. Most people ignore this.

3) Electric cars don't necessarily reduce pollution. Instead they shift it somewhere else. This is a good think if you live in L.A. It's not a good thing for Delta if that's where L.A.'s power comes from.

4) Most electricity is still generated by coal, which is far dirtier than gasoline. Nuclear is the only clean way to generate electricity, but of course the problem there is that's it's clean almost all the time, and then hugely dirty all at once. Hydro is clean, but we no longer build hydro projects. Solar and wind power ... well ... they're not anywhere close to breaking even yet.

5) The big advantage of electric cars is the one no one talks about or understands very well. This is that it is far more efficient to burn coal in a huge plant, and send electricity down the wires than it is to carry gasoline around with you and burn it as you need it.

Properly phrased, the tradeoff is that an electric car has bigger costs now, bigger costs later, transfers the pollution to other people, who probably use a far dirtier power source ... in exchange for efficiency gains in power production.

None of this is to say that this might not be a good idea on net. But I am saying that people who don't start and end by talking about the efficiency gains from huge, coal-fired, power plants in remote locations ... probably aren't worth listening to.

Dr. Tufte said...

100/100 for Chad.

Su Jung Poe said...

I don't agree with Chad's implication that the electric car market is separate from the market for gasoline-driven cars. Electric cars serve the same purpose as traditional, gasoline-driven cars and will be considered by the same people who are currently buying cars that run on gasoline.

With this in mind, I don't think that sales of cars that run solely on electricity will rise anytime soon. Although there are viable options from Tesla, Nissan and other companies, electric cars just aren't as convenient as gasoline-driven cars right now. Gasoline-driven cars can be refueled almost anywhere in a matter of minutes, have greater range and are more familiar to mechanics than electric cars. Because of these and other challenges, cars driven solely by electricity will not fare well in the short-run.

Dave Tufte said...

Su Jung Poe: 50/50

I think you're two paragraphs are contradictory.

The first one says there is just one market, while the second one gives lots of reasons why there are two markets.

I recommend that we view this as two markets for substitutes.

Having said this, Su Jung Poe has listed out the big problem with electric cars: there are a lot of variable costs on which it doesn't compare well. Since those variable costs are what go into the marginal costs of driving, this means that the marginal cost of driving an electric car is higher. This means fewer miles at a higher price per mile.

This is a problem because our current government has chosen to subsidize the fixed costs of cars and (a little) infrastructure, but not the variable costs to drivers (mostly coming from limited that infrastructure). When you subsidize the fixed but not the variable costs, what you're doing is making it easier to buy but not easier to use. This only makes sense if the government is mostly interested in supporting firms that make electric cars rather than doing anything about pollution. I may be cynical, but that wouldn't surprise me.

So here's a prediction for you. At least for the next 10-20 years, electric cars are going to be like the electric golf carts/mules that are common around Utah. Basically, something that is for occasional use, and that is probably a waste of money, except for the fact that the government is offering a deal that's too good for many people to refuse.