No Excuses: Falling Gasoline Prices Are Impacting Tesla's Sales

| About: Tesla, Inc. (TSLA)
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Summary

Falling gasoline prices are unequivocally bad for Tesla sales right now, all other things equal.

Even rich people prefer to justify a $100,000 purchase by saying they’re saving money somewhere in the equation.

The direct variable cost per mile of driving electric remains 2.5x cheaper than gasoline at $2.50, but by that argument, 100% of car sales would already have been electric.

There is more to the total factor cost of owning a car than simply the variable cost of fuel, including reliability and flexibility.

The good news for Tesla is that if gasoline prices increase, it would be 100% good news: No excuses apply to both directions.

The purpose of this article is to discuss the reasons falling gasoline prices are certain to impact Tesla's (NASDAQ:TSLA) car sales, right now, today. And also, why the reverse would also be true.

First, let's line up the two arguments typically cited as the reasons falling gasoline prices will NOT impact Tesla's sales.

1. "Rich people don't care."

As a variant of this argument, TSLA bulls claim that while buyers of a $70,000-$140,000 Tesla today don't care about gasoline prices, future buyers of a $30,000-$60,000 Model 3 (2017 and later) will care. However, by that time - 2017 - gasoline prices would be back up to where they were six months ago, or higher, so therefore "Tesla crisis averted."

However, I'm claiming there is some impact from today's lower gasoline prices on Tesla's Model S sales right now, today - not three or more years down the road. The background to this thesis goes into the motivations behind buying a Tesla today.

Clearly, people who buy a Tesla today don't do it strictly because of cost reduction. If they did, they would buy a cheaper car because depreciation and opportunity cost of capital alone are more expensive than the energy consumption. This goes not only for Tesla, but for all cars in that relatively expensive price range.

However, just because you didn't buy the Tesla because you thought you could save $1,000 or $2,000 per year on gasoline, that doesn't mean gasoline savings didn't enter the purchase consideration at all. Even very wealthy people like to think that they are saving money somewhere, no matter how small and disproportionate in relation to their other spending in life.

How many multi-millionaires have you met who argue and go to great lengths to save a few pennies or dollars here and there? Their mortgage and/or opportunity cost of owning their home may be $10,000 or $30,000 per month, but they still argue about whether that suit jacket at Macy's was eligible for an extra $50 discount.

Many wealthy people enjoy telling their friends, colleagues and neighbors that they've saved money, especially by employing a new technology. Perhaps they justify purchasing the fifth car in the household to their spouse by saying "But at least we're saving $2,000 per year on gasoline."

In the end, we can never know enough to quantify this impact. However, logically it must be there to SOME degree. The impact is greater than zero, at least among some buyers. It's merely the mirror image of the demand for electric cars going up if gasoline increases in price more than the price of electricity.

Even if gasoline prices went down to zero, there would still be some residual demand for Teslas. Some buy them for the outstanding performance, such as the blistering 0-60 MPH acceleration. Others buy them for the technology, such as the excellent infotainment system.

Teslas are different, and they have filled a void where some people had boredom creep into their premium car purchase patterns. In talking to owners, I've found this to be the biggest factor. Someone might have been on his or her third Mercedes S-Class in a dozen years, and now something new and different presented itself. Why not mix things up and try something new, especially if you could justify it by telling your buddies that you save so much on gasoline?

The bottom line here is that gasoline prices are neither 0% nor 100% of the Tesla purchase motivation. It's a broad gray zone, where it matters more for some people than for others. It's one factor among many, near 0% for some and closer to 100% for others.

The argument that falling gasoline prices have absolutely zero impact on Tesla is, however, simply not credible. There is some impact, right now. The question is just how much - and that can't be measured because there are multiple simultaneous other factors at play.

2. "But electricity is still cheaper."

Another ostrich approach to falling gasoline prices impacting Tesla sales today is to say that, despite the fall in prices, electricity remains cheaper than gasoline, and therefore there should be zero impact. Let's see how that math works.

Many electric cars such as Tesla can travel approximately three miles per kWh of electricity. If you assume that the price of electricity is the nationwide average of $0.12 per kWh, that means $0.04 per mile. A 25 MPG-car consumes 0.04 gallons per mile, which at $2.50 per gallon is $0.10.

In other words, even at $2.50 per gallon, the electricity cost-equivalent is $1.00 per gallon. The price spread is 2.5x in the battery-electric car's favor.

That math is technically true, but there are two counterarguments against it.

  • It proves too much.

To be sure, the directly measured cost per mile remains 2.5x higher for a gasoline car even at $2.50 per gallon, but by that logic, when gasoline prices were even higher than $2.50 - ANY price higher than $2.50 - it implies that electric car adoption ought to have already reached 100%. And we know that it's still nowhere close to 1% (Tesla's US market share is approaching 0.1% for example).

And this says nothing about a comparison with a 50 MPG-car, such as a Toyota (NYSE:TM) Prius. At $2.50 per gallon, the direct variable cost per mile isn't $0.10, but $0.05 - or extremely close to the $0.04 for an electric car such as a Tesla. At that point, the electric car's margin of error is essentially gone.

This obviously leads us to the second part of the counterargument to the direct variable cost-per-mile comparison: There is something else at play here!

  • Direct variable cost isn't everything in a car purchase decision.

The notion that everything that matters when you buy a car is the cost per mile in terms of direct energy consumption is clearly false. What matters is the total cost of ownership, and it has to be adjusted with the car meeting basic performance and usability criteria on top of that.

The argument reminds me of what some people naively say to justify home ownership: "Why are you throwing away your money on rent, when you can just buy a house for cash and therefore have much lower monthly expenses?"

The point is that on the matter of cost alone, there is more to owning a car than just cost per mile in terms of electricity versus gasoline. For starters:

  • Cost of buying the car to begin with.

If you pay $10,000 more for the battery-electric car, you have additional depreciation and opportunity cost of capital. On a $10,000 incremental cost example, perhaps an additional $2,500 in depreciation in the first year, plus another $500 in capital, for a total of $3,000. If your Toyota Prius wouldn't cost you more than $600 per year in gasoline (12,000 miles at 50 MPG and $2.50 per gallon), there goes five years of cost right away! ($3,000 divided by $600) And that's assuming that your cost of electricity is zero.

  • Concerns about battery depreciation.

This may or may not come to pass, but the depreciation factor here is certainly not zero. If the battery costs $10,000 more than a gasoline engine, it has to be depreciated for an eventual potential swap-out when the capacity has declined, say, 30% by the end of the warranty period. That's a few thousand dollars that will be written off over and above the "regular" car body depreciation.

  • Other reliability concerns.

For many people, the main reason to own a car is to be able to get to work, reliably and on time. Being late could mean being fired. Whether it's accurate or not, some people are not yet comfortable relying on the electric charge not getting interrupted in the middle of the night, keeping the car owner from getting to work in the morning in a timely manner. And what if you forget to plug it in, just like you sometimes forget to plug in your smartphone? Is having an electric car worth risking not being able to get to work in the morning? What if you forget something at home and have to turn around?

  • Basic range and recharging limitations.

This is obviously the big one. People buy cars not only for the conditions they encounter on 99% of days, but also to handle the unexpected emergency. Being able to take a sick child to the hospital or to attend a sudden business meeting should not be a limitation of owning a car. Therefore, to the extent that some people value this freedom, it doesn't matter whether gasoline is $2.50 or $5 or even $10 per gallon - there will still be some resistance to electric cars as long as their range is less and/or refueling time and convenience is lower. This will change over time, perhaps within only a few short years, but it remains a major obstacle to EV adoption today.

That basically explains why, despite electric cars costing only $0.04 per mile on a direct variable basis, they don't get 100% market share even at $5 per gallon gasoline, let alone at $2.50 per gallon gasoline. The fact that $2.50 is still higher than $1.00 per mile equivalent is simply not the relevant measure, anymore than you can allegedly lower your housing cost by paying cash for a house instead of renting.

What's the bright side for Tesla in all of this?

When it comes to falling gasoline prices, none whatsoever. There is no silver lining in this. There is no way to spin it.

However, on the bright side, the reverse is also true. If and when gasoline prices start to go up again, you can't spin that in the opposite direction either. Rising gasoline prices will be good for Tesla - and other electric cars - unequivocally. All of the arguments I listed above will turn around 180 degrees. There cannot be any spin then either, from Tesla bears.

So will gasoline prices go up or not? I don't offer any opinion on that at all. I didn't anticipate the gasoline price decline over the last six months, and I most likely won't be able to predict any future sharp increase either. But if it happens, it will be as good for Tesla on the way up, as it was bad on the way down.

A subject for a separate article will be: What if gasoline prices increase 20%, but electricity prices increase 30% or 50%? How would that impact electric car sales?

Disclosure: The author is short TSLA.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: At the time of submitting this article, the author was short TSLA. However, positions can change at any time. The author regularly attends product launches hosted by many automakers, and some of those trips are paid for in whole or in part by the automakers. The author also regularly test-drives cars provided by the automakers.