Why Tesla And The EV Will Win Over Gas

| About: Tesla Motors (TSLA)

According to the U.S. Department of Transportation, the average fuel consumption per passenger car is around 550 gallons per year. At a gas price of $3.50 per gallon, that makes $1925 per year for the average US car. Some of us obviously spend much more on gas than that.

How far do these $1925 take you? Average miles traveled per gallon are around 22 for a passenger vehicle, so that's 12,100 miles (or 19473 km), which by the way is about half way around the equator.

How much would you pay for the same 12,100 miles in an EV? Well, let's take Tesla's (NASDAQ:TSLA) Model S as an example. The mean electricity price in 2011 was 11.8 cent/kWh for residential customers in the US, according to the US Energy Information Administration.

Example 1: If you trust Tesla Motor (TSLA) their 40kWh version will take you 160 miles (at 55mph) which would cost you $4.72 - or 2.95¢ per mile - which means you would pay $357 for your average 12,100 m/year instead of $1925.

Example 2: That would be great but since it is not realistic, let's say only 80% of your outlet's power ends up in the Tesla's battery, and let's say those 40kWh only take you 100 miles instead of 160 miles, because you like putting down that pedal. That means you pay 4.72¢ per mile or $571 per year - still less than a third of what a gas car cost you at $3.50 a gallon.

There are, of course, a hundred different ways to play around with those figures, but there is no way the running costs of an electric vehicle exceed those of a conventional one. Unless gas becomes really cheap again, cheap like in the 1990s. The lowest average US at-the-pump price during the last 8 years was about $1.60 per gallon. At that price the average 12,100 miles only cost $880, still significantly above what a Tesla Model S's running cost are, you don't even have to look at servicing costs, because there is a clear advantage in the EV-technology when it comes to maintenance, which is not disputed.

When would you start saving money? This year the price tag of a new car in the US was $30,000 on average. The most affordable Tesla Model S will set you back about $50,000. (A more fair competition for a Model S would be a BMW 5, which costs pretty much the same as a low end Model S, just as the more high end BMWs like the 6 or 7 have very similar prices to the high end versions of the Model S.) A huge difference of $20,000 in purchasing price, right? True enough, if you take the figures from Example 2, it would take almost 15 years to make up for the higher purchasing price. Compared to a same-class BMW, however, you would start saving money on day one.

But what about people who really drive a lot, like taxi drivers. According to Metro Taxi Denver one of their metro taxis drives about 70,000 miles per year. Which would mean your usual conventional car would need 3,181 gallons or $11,130 in gas per year at $3.50 per gallon. In this case, of course, the $20,000 would be compensated for within 2 years.

Any sensible person who runs a taxi fleet or a fleet of company owned cars or any intelligent commuter will make similar calculations at some point in the next few years.

There are numerous factors which could bring down Tesla, many of them mentioned in their SEC fillings (view some of these for additional risk factors) but the only factor which could stop the EV as a technology from taking over gas cars in the long term is gas prices, which cannot stay low for an extended period because production will decrease drastically if prices fall (a lot of production sites are not profitable below the $80-$85 region) thereby sending prices higher again.

And by the way, in other countries where the difference between gas prices and electricity prices are even bigger the consumer will find it even more rewarding to sell the old gas guzzler an buy an EV. An extreme example is France: Today a liter of gas costs you €1.69 in France - that is $8.25 per gallon. And the kWh of electricity costs you about €0.13 if you are a French retail customer, thanks to France's cheap nuclear power.

So what can stop the EV? Please leave a comment if you have any suggestions. I am long Tesla, as you might have guessed.

The triumph of the EV already seems to be irreversible, but Tesla might face some serious problems during the next few month, still it is - as of now - the only pure play EV stock. And owning a stock which has the problem of not being able to meet demand is much more comforting to me than owning a company which has the problem of producing more cars than people want to buy, i.e. the rest of the auto industry.

I would recommend to anyone with enough risk appetite who wants to get in on Tesla to buy at dips below $28; that's what I do. Elon Musk bought shares between $28 and $29 in June 2011, increasing his stake by some $40 million.

To anyone owning shares of conventional automakers (GM, F, and the German carmakers) I would recommend taking profits to stop risking your money: Supply outstrips demand, and they had a good run already.

Disclosure: I am long TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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