Does gas prices affect electric cars?

Does gas prices affect electric cars?

Inflation has touched everyone’s lives in the United States.

With US consumer prices increasing at a rate of 8.3 percent in April, it is no wonder that the market has seen a rise in a range of products from household staples to the no-longer-dollar store. Many Americans have especially felt the rise in price of gas, with the national average at the exorbitant price of $4.596 per gallon as of late May, far higher than last year’s average of $3.039. Depending on the state, these prices are sometimes even higher, with Russia’s invasion of Ukraine creating an upward pressure on prices as well. As costs associated with diesel and regular gas continue to grow, this begs the question: would a switch to electric vehicles (EVs) be justified? 

At the moment, there are positive signs that the increasing oil prices are set to taper, with crude oil prices falling significantly, dropping below $98 a barrel in late April. Coupled with the war in Ukraine, the uncertainty surrounding the COVID-19 situation in China (one of the largest importers of crude oil) has decreased the demand for crude oil. Demand is projected to continue to decline an estimated 1.4 million barrels a day, according to Rystad Energy. This would mean the global average amounts to 99.6 million, a substantial reduction from the peak of 100.2 million in 2019. Moreover, as of March, it seems that many Americans are willing to stand the price shock. A Wall Street Journal poll found that about 79% of Americans would still support a ban on Russian oil despite the impact on energy prices. 

However, it seems that this sentiment is no longer widely held. As summer starts and ushers in travel season, diesel prices are expected to continue to rise and even worsen in the coming month. Climate uncertainty is worsening these projections as well, with supply-side threats coming from an active hurricane season in August along the Gulf of Mexico, according to Tom Kloza, Global Head of Energy Analysis at OPIS, an energy pricing service. With both demand and supply side pressures, diesel prices show no sign of tapering off despite the broader global projections from a few months ago. 

These negative projections can be affirmed by the Biden administration’s considerations of releasing diesel from a rarely used stockpile. This is especially concerning since rising diesel prices are not only supposed to affect motorists but also trickle down to basic consumer goods, as diesel is a necessity for trade. While motorists might have been able to withstand a rise in gas prices on its own, the rising prices alongside other staples place rising financial pressure on households and further amplify the strain induced by the high gas prices. 

The reasonable move for those in the market for cars would be to switch to EVs due to the greater pricing stability of electric charging as opposed to constantly fluctuating gas prices. Such is the selling point for many EV manufacturers. However, EVs have not been untouched by inflation prices and instability in global markets. CNBC found that in Boston and San Francisco, metropolitan cities where EVs are popular despite the fact that electricity is more expensive than the national average, electricity pricing has also been climbing as gas has. 

Aside from rising charging prices, EVs themselves are increasing in price due to the rising input prices. Due to rising commodity prices and rising demand for key inputs such as battery minerals required for EV batteries, the cost of EV battery cells is projected to rise 22% from 2023 through 2026.

Tesla, for example, is similarly encountering high pressure from inflation. EVs are facing a 5% to 10% increase in prices across the entire range of vehicles due to inflationary pressures on ‘raw materials and logistics’. Rivian and Lucid Group have similarly raised their prices. 

Though initial out-of-pocket costs are higher, charging stability may prove valuable. Even if price of electricity is growing, the rising price of gas far outpaces it both nationally and in cities like San Francisco and Boston, as per the CNBC report. Figure 1 below clearly depicts this. Not only is the price of gas consistently higher and projected to continue rising, but prices are much more volatile due to its reliance on external factors. In comparison, the price of electricity is regulated much more easily.

Chart, line chart

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As demand for new cars climbs, it comes as no surprise that many in the market for cars are looking to switch to EVs or at least more fuel-efficient vehicles. According to data from TrueCar Inc., those shopping for EVs increased 280% in February 2022 compared to 2021. A similar upward spike was seen for those looking at hybrids, which rose 83%. The general consumer trend is therefore shifting to lower dependence on gas, which is unsurprising given the current levels of market volatility.

The problem, however, is that the supply of EVs is far lower than demand, which follows the general market trend of demand for cars outstripping supply. The majority of such cars are already sold once they hit dealers. CNBC reports that customers face at least a few months to years waiting to buy their EVs. Luxury models may be exempt from this, but they are often unaffordable to the average consumer. 

Clearly, consumer preferences are moving away from regular cars and toward EVs instead. Changing preferences are accelerated by a growing impatience with the instability of gas prices and the pressure it is putting on household expenditure. However, such demand is likely only to worsen the shortage for EVs. Unless input prices for EVs decrease or greater subsidies are placed on more upscale models, it is unlikely that EVs will be an affordable option for many American motorists, regardless of the demand.

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Does gas prices affect electric cars?

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