By Ray Sweha

Yesterday’s GM-Volt post reminded me of a post I made in the forum making similar observations about the world price of oil, and why the electric car is a needed solution to U.S. energy independence.

I also just happened to re-watch "Who killed the electric car?" and " Revenge of the electric car" and a couple of ideas popped into my head that I want to share and get your feedback on.


But first, I’ll note this will just be some issues I’ll throw out there for your consideration, having looked at them myself for a while now. I’ll qualify my outlook and say I cannot account for all potential intellectual rabbit trails one could also run down given complex geopolitical and macroeconomic variables, so just call this a friendly conversation starter, and I’m open to your views as well ...

I'll start by asking a a question: What controls the price of a barrel of oil?

The short answer is oil prices are dictated by the economic law of supply and demand.

Following is a chart that indicates that the price of oil in the year 2000 was around $30 per barrel.


Why is it around $100 per barrel now?

The product didn't change and the cost of producing oil didn't change dramatically to justify a 300 percent increase in price. So why the change in price?

Answer: Because oil has had a monopoly over transportation – i.e. for a given level of supply, the price keeps going up as long as demand exists. And as we know, the demand persisted because people had to use gas to power their car; there was no other alternative.

This is evident if you look at the profits of Exxon-Mobil is the last 10 years which shows its profits being multiplied by a factor of 2.5.


At the end of the day, oil producers (mainly OPEC countries) control the amount of supply to ensure the maximum amount of profit. Every now and then, they are bullied by the U.S. and other big consumers to increase the supply to ease the pressure at the pump.

But ultimately, it is their natural resource and they have the right to control it the way they want!

From the data around Y2K, we know that a $2 per gallon would keep oil companies profitable. I hate to say it, but Gingrich was right to say that $2 per gallon is a possibility. His method is wrong though.

The way to bring the price of oil down is not by producing more of it, but by creating competition to it. Once there is a financially viable alternative to gas, its prices will fall. And they can fall all the way to $2 per gallon.

The second question – and leading to my main point in this article – is how will the mass adaptation of EVs affect the price of oil?

And, I’ll ask further, what will the oil companies do about it?

Linked here is a really good article in the Washington Post blog about the anticipated reduction in the price of batteries.

"New research from analysts at the McKinsey & Company suggests that the price for lithium-ion batteries could fall by as much as two-thirds by 2020,” says the WaPo. “Instead of $600 per kilowatt-hour today, batteries would cost just $200/kwh in 2020 and $150/kwh in 2025. And that, the report suggests, would upend the entire automobile industry."

For the purpose of this article, this graph is the most informative one:


The above chart tries to estimate at what value of battery price per kwh that EVs can viably compete with internal combustion vehicles.

The graph predicts mass adaptation of EV's when the price of gasoline hits $5 per gallon – in relation to the current generation of battery technology ($500-600 per kwh).

Fuel prices are predicted to hit $5 in a couple of years when the global economy begins to recover. The question – again – is what will the oil companies do?

Knowing that there is about $100 trillion worth of oil still left to excavate, oil companies won't wait for EVs to put them out of business. What can they do? They can lower the price of oil.

Now, to the sad part of this analysis: even at $150 per kwh battery (today we are around $500-600 per kwh) an ICE is more economical at $2 per gallon, which is still profitable for oil companies.

So the final question is, could the oil companies kill the electric car again? The answer is, probably yes, by keeping the oil price down thus discouraging consumers from buying EVs. This will force companies to stop producing EVs due to lack of demand.

How can we save the EV? For starters, by better educating the public about our dependence on foreign oil and that we will never have energy security as long as we are addicted to the troubled Middle East oil. Remind them that a gas monopoly over cars leads to an ever increasing gas prices. Giving them examples from history that an armed conflict in an oil-rich region could cause a spike in oil prices throwing the economy into recession and leading to the unemployment of millions of Americans. Ask them how many wars we need to send out troops to to guarantee the flow of oil to global markets?

IMHO, the best case scenario is that EVs and ICEs will co-exit for a while, the existence of EV's will keep oil prices in check, preventing oil companies from racking record profits relying on the fact that they have a monopoly over personal transportation.

What do you think?