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A silver lining for the oil price cloud – Energy Institute Blog

Russia’s war on Ukraine will likely accelerate emissions reductions from transportation.

This week’s blog is co-written with Erich Mühlegger and David Rapson from UC Davis.

On the growing list of “things for keep you at the top at nightthis week gave us an opportunity to worry about soaring oil prices. The Brent Crude benchmark briefly approached $140 a barrel and as of this writing has fallen to $112, about 50% higher than it was in early December. National average gasoline prices have climbed to records (not adjusted for inflation).

Oil is an essential input into all sorts of other goods and services that we consume and use daily, so as oil becomes more expensive, so do many things that we buy. No spike in commodity prices grabs the headlines like gasoline. Concerns about how rising fuel prices will contribute to inflation (i.e., erode consumers’ real purchasing power) are growing, and policymakers are looking for optionssuch as gasoline tax exemptions.

However, not all oil price news is bad. Many readers of this blog are interested in the so-called “energy transition”, which hopes to steer our economies away from fossil fuels and towards clean electricity as the main source of energy. And for those readers, “gloomy science” is here today to offer a silver lining. The higher oil prices rise, the more economically advantageous it is to buy an electric vehicle (EV). Now that we’re experiencing an oil shock reminiscent of the 1970s, could this be another catalyst accelerating the adoption of electric vehicles? Let’s take a look at some of the factors.

The demand side

Although discussions about electric vehicles often focus on things like range anxiety, access to charging and other features, electric vehicles are generally cheaper to drive than gasoline cars, and even more so when gasoline prices are high. For every additional dollar per gallon of gasoline, the cost of driving an average conventional car in the United States increases by approximately $400 to $500 per year. Over the lifetime of a vehicle, these costs add up and make owning an electric vehicle more attractive.

But are these potential savings significantly boosting EV sales among car buyers? In a new working document, “Do energy prices affect the adoption of electric vehicles?”, we quantify the importance of electricity and gasoline prices in the decision to adopt electric vehicles. The logic is simple. High electricity prices make electric vehicles more expensive to drive, making them less attractive compared to gasoline alternatives (all other things being equal). On the other hand, high gasoline prices have the opposite effect – they make traditional cars more expensive to run (again, holding other factors constant) and make electric vehicles more attractive to buyers. of new cars.

Our study takes advantage of the fact that there are many electric utilities in California, each selling electricity at a different price. The details are complicated, but the result is that the big three utilities – Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric – have very high (marginal) prices, while their municipal counterparts charge much higher prices. low. Although EV-specific rates exist and tend to be lower than the Big Three default rate today, the majority of EV owners were and still are on the default rate plan. Even electric vehicle rates in IOU territories tend to exceed the rates of their neighbors. Of course, gasoline prices also vary by location and over time. Our analysis combines EV purchase data with electricity and gasoline price data, and we use standard approaches to isolate the effects of energy prices from other factors that could also affect the VE request.

It turns out that electric vehicle buyers are sensitive to energy prices, but much more to the price of gasoline than to the price of electricity. No matter how we slice and dice the analysis, the results showed that EV demand was 4-6 times more sensitive to gasoline prices than it was to electricity prices.

To put this into perspective, we calculate how much EV demand changes in response to a one standard deviation increase in the cost of driving a mile (this allows for an apples-to-apples comparison between electric and petrol). A 5 cents per kWh increase in electricity prices leads to an 8% reduction in EV demand. A roughly “equivalent” change per mile in the cost of gasoline – a 40 cent per gallon increase in the price of gasoline – increases EV demand by 57%. Although we speculate if we were forecasting from gasoline prices in our study to very high gasoline prices today, our results suggest that there will be many more people buying electric vehicles due to high gas prices.

The supply side

However, this is not the end of the story. Several aspects of the post-pandemic world are pushing in the opposite direction, to slow EV adoption, and these factors have been accentuated by the war in Ukraine. First, as high gas prices make a new electric vehicle more attractive over gas-powered cars, rising prices have hit the wallets of American households, making them less likely to buy. any new car.

More importantly, however, is the fact that it is not just the price of oil that is skyrocketing. Even before the war in Ukraine, commodity prices like nickellithium and cobalt had jumped. And since Russia is a major producer of metals, the war has caused prices to soar even further. These are some of the key inputs in battery production, which in turn are one of the biggest entry costs of an EV.

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Nickel price ($/tonne, Source: Wall Street Journal)

These steep increases in electric vehicle component costs have coincided with ongoing logistical problems that have plagued much of the global economy for the past two years. Again, the situation in Ukraine has only worsened supply chain issues. These last two points in particular have hampered buyers of electric vehicles who have had to deal with higher prices and increased wait times.

EVs still have a long way to go

Despite supply shocks, there is every reason to expect that attention to fuel prices will further accelerate EV adoption. But don’t expect the transition to green vehicles to dramatically reduce oil demand and gas prices anytime soon. Worldwide in 2021, electric vehicles were less than 9% new car sales, with five out of six purchases taking place in China and Europe. Also, it’s unclear exactly how much gas today’s electric vehicles save the US economy. Related works By ourselves and others on Electric Vehicle Use in California has suggested that electric vehicles drive less than conventional cars, so we can’t count on every new electric vehicle to displace the average amount of gasoline used by a car currently on the road.

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But there is every indication that electric vehicles will play an increasingly important role in the transportation mix and put downward pressure on demand for gasoline-powered vehicles in the medium to long term. If energy prices are allowed to reflect their true social costscustomers will be more and more be attracted to electric vehicles, even in the absence of tax credits and other incentives. The events of the past month were tragic in many ways, but their impact on gasoline prices will likely make the energy future arrive a little earlier.

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Suggested citation: Bushnell, James, Muehlegger, Erich and Rapson, David. “The Silver Lining of the Oil Price Cloud” Energy Institute BlogUC Berkeley, March 14, 2022,