Soaring Fuel Prices: An Impetus to EV sales

By Parth Chhajed | Edited by Atiyah Krishnan

Globally, oil prices have been looked at as a very important economic growth indicator.

It is one of the key elements which affects the prices of more or less every commodity in the market. A rise in oil prices brings inflationary pressure on the economy, especially in a country like India where we are predominantly dependent on imports for our oil supply.

The rise in oil prices also plays a crucial role in the automobile industry. It takes a big toll on the margins of the auto company as it affects the type of vehicles demanded by the customers and the way the vehicles are designed. The low responsiveness or “inelasticity” of both supply and demand to price fluctuations in the short run is intrinsically linked to the volatility of oil prices. In the near future, the capacity for oil production and the machinery that relies mostly on petroleum products for energy are both rather set.

The inflated price of the product mainly takes into account the rising cost of production. For instance, one of the key components in a vehicle is tires. A rise in the price of oil is followed by an increase in the price of tires. This is essentially because of the extensive use of oil in the production process of tires which involves cooling and then heating activities. The increase in oil prices has an impact on the sale of automobiles, and it’s plausible that overall sales could fall as a result of the higher costs that manufacturers must now charge for their goods. Even if the auto business dramatically cuts its price, its sales would decline. This is due to the short-term inelasticity of oil demand. 

Giving an example will help convey this more clearly:

The economy keeps going even if the price of oil increases. People must still report to work. Since there are no quick substitutes, there will be an inelastic demand for oil, which means that individuals will continue to buy and pay more for it, but they will adjust their spending habits elsewhere due to their fixed income. Over time, individuals will discover substitutes, such as using battery-powered electric vehicles in place of conventional automobiles. Due to their fixed incomes, customers will have less money to spend if they are forced to pay increased fuel prices.

According to economic theory of demand, using one good is related to using another, but using substitute goods refers to using products that customers consider to be similar to or comparable to one another. Internal combustion engine (ICE) vehicles are viewed as complementary products in the automotive business, although battery-powered counterparts can be seen as acceptable substitutes.

We conducted a regression test to check whether EV sales are increasing with the rising oil prices       

IndependentDependent
xy
YearCrude Oil prices($)Electric Vehicle Sales
201553.03543000
201637.22792000
201754.711263000
201871.342083000
201964.282276000

The trend line clearly shows an uptrend i.e. over the last 5 years we have seen that as the oil prices have increased, the EV sales numbers have followed the trend. 

r^2 (regression coefficient), which tells us about the change in value of dependent variable  corresponding to the unit change in independent variable, comes out to 0.6465 signifies that there is a 64% correlation between rising oil prices and EV sales. 

However this is not the only factor which is driving EV sales, there is an amalgamation of several different things that need to be in place to get the EV math right.

It can be presumed that only a dearth of people are going to shift to EVs for benevolent reasons such as reducing pollution. To bring these people into the EV ecosystem, getting the overall cost of acquisition and the operational cost at par with the traditional fuel-based vehicles is an important requisite

Where the average running cost of a fuel-based vehicle is around ₹8-10 per km, for an EV it’s just ₹1-2 per km. This gets the running cost for an EV to just about 15-20% of that of a fuel-based vehicle. Servicing cost for an EV for a 5 year period is ₹25000 per annum while for a traditional fuel-based vehicle it comes out to be ₹40000 per annum. The difference in the cost is mainly due to the limited number of moving parts in an EV vehicle. In an ICE vehicle, around 20000 moving parts are taking the maintenance and repair costs higher. 

Putting all these numbers into perspective, for an ICE vehicle the total amount spent on the fuel costs would be around 5.85 lakhs in 5 years (assuming the annual commute to be 15000 km) but in the case of an EV the expense would only be around ₹83000. 

The acquisition cost of EVs is higher than that of ICE vehicles, so it’s vital to keep that in mind before becoming overwhelmed by the number of fuel expenditures saved. The battery, which powers EVs and represents between 40 and 50 per cent of the total cost of the car, is also expensive, as are the motor and sensors. An electric vehicle costs about 30% to 40% more than a fuel one. The battery is the major part of an electric vehicle. The motor, control module, and other extra parts are necessary for battery operation. These vehicles are currently being produced on a smaller scale. Costs will stay high until the output is raised. Additionally, as production rises, the price will eventually decrease. It is irrefutable that the EV narrative is something which would grow organically over time but the rising fuel prices have just accelerated the process of adoption.

References 

The economic impact of rising oil prices in the automotive industry – law essays. (2020, March 30). Retrieved September 18, 2022, from https://lawaspect.com/economic-impact-rising-oil-prices-automotive-industry/

Popli, N. (2022, May 03). High gas prices drive up interest in electric vehicles. Retrieved September 18, 2022, from https://time.com/6173178/high-gas-prices-electric-vehicles/

Increasing fuel price and electric vehicles in India: Scenario insight: GD. (2021, December 10). Retrieved September 18, 2022, from https://mbaroi.in/blog/increasing-fuel-price-and-electric-vehicles/

Brown, H. (2022, August 23). Does getting an electric vehicle make financial sense? Retrieved September 18, 2022, from https://www.cbsnews.com/minnesota/news/does-getting-an-electric-vehicle-make-financial-sense/

Money today: Does it make sense to invest in Evs? (2022, January 03). Retrieved September 18, 2022, from https://www.businesstoday.in/magazine/investment/story/money-today-does-it-make-sense-to-invest-in-evs-316715-2022-01-03

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