Elon Musk just acknowledged something interesting, even though he didn’t actually say so.
What he did was raise the base price of the Model 3 by almost $4,000 — to $38,990. Which is an admission — without formally saying it — that the $35,000 price point he promised for years isn’t tenable. That Tesla would lose money on each sale at that price point.
Which raises an important question.
Several, actually. The first is: Will electric vehicles ever be affordable? And if not, how can they ever become mass-market vehicles? And if they can’t ever be mass-market vehicles, what is the relevance of their being “clean” (leaving aside whether they actually are — in the aggregate — as opposed to at the tailpipe)?
Put another way, economics trumps politics. And mandates. People buy what they can afford.
And the economic truth is that most people can’t afford a nearly $40,000 electric car like the Tesla 3, or even a $30,000 electric car like the Nissan Leaf, which is the least expensive electric car on the market. It costs twice as much as an otherwise-similar compact economy car without the electric drivetrain.
Unless the cost of gas doubles, which seems unlikely given the massive increase in supply, it is unlikely the Leaf will ever save its owner any money, even if he never spends a cent on gas.
The $15,000 price difference between the Leaf and the non-electric equivalent — a car like Nissan’s Versa hatchback, which stickers for $12,460 to start — buys about 6,250 gallons of regular unleaded gasoline at current prices (about $2.40 nationally).
That is enough gas to buy a small ocean of gas. Enough to fill the typical economy compact car’s 12 gallon tank about 520 times. If we assume the car averages 35 miles per gallon (420 miles per tank) that works out to about 218,000 miles of driving before the Leaf offers any economic advantage to a prospective buyer — leaving aside the range/recharge issues, which aren’t small potatoes considerations for most people.
It takes about 15 years to accrue 218,000 miles on the odometer at 15,000 miles per year. And 15 years is about five years longer than most people keep a car before trading it in and buying another one.
It is almost certainly longer than an electric car’s battery pack will last before it needs to be replaced — at a cost of several thousand dollars more — which adds another layer of cost to the economically untenable EV equation.
Electric cars remain specialty cars — not because they are electric but because they are expensive.
EVs constitute about 1 percent of the market, most of that concentrated in affluent urban areas such as San Francisco and Washington. They cannot become mass-market cars until they become much more affordable, not just to drive but to own.
And that doesn’t appear to be forthcoming and may never be, primarily because of the cost of the EV’s most important component — its battery pack. Most EVs — including the Tesla and Leaf — use lithium-ion battery packs and the materials (including cobalt and nickel) are inherently costly while the batteries themselves are intricate, high-complex systems that are expensive to put together.
Absent a massive reduction in battery costs — something constantly promised but yet to be delivered — EVs will remain expensive specialty cars that happen to be electric.
But what happens when the market is flooded with high-cost electric cars for which there isn’t a market? Or rather, buyers?
This is going to happen in the very near future as every major car company ramps up EV production to meet government demands. These include “zero emissions” vehicle mandates that amount to electric car quotas that must be filled — even if they can’t be sold without giving them away.
For example, California requires every major automaker selling cars in the state to sell a certain number of EVs — the only vehicles that meet the “zero emissions” criteria — before that manufacturer is permitted to sell any cars at all.
But therein lies the rub. The market for electric cars is inherently limited by what people are able to pay for them.
Federal subsidies — especially the $2,500-$7,500 per car tax rebate — have shoved some of this under the rug, so to speak. But the tax rebate was based on low-volume, as an inducement to spur electric vehicle sales.
The rebate declines — and ultimately, disappears — as EV production ramps up. Once a car company produces 200,000 EVs, the prospective buyer is no longer eligible for them. This just happened to Tesla — and it effectively means a price uptick equivalent to the disappeared subsidy for the prospective EV buyer.
Which is another way of saying that EVs are about to become even less mass-market.
Tesla’s $38,990 Model 3, for instance, will soon actually cost the buyer $38,990 — not $38,990 less $7,500. That will make it a much harder sell EVs — and not just Tesla EVs — to people who have to consider what it costs regardless of what it emits.
Push is about to come to shove.
Eric Peters has been covering transportation and regulatory issues for the past 25 years. He wrote this for InsideSources.com.