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By John Petersen

WTI Spot Price – Long-Term Trend

This week has been fascinating because of three articles that found their way to my computer. The first was a thematic piece in McKinsey Quarterly titled "Profiting from the low-carbon economy" that included a carbon abatement cost graph which showed full hybrid automobiles (HEVs) offered CO2 abatement savings of roughly $50 per ton while plug-in hybrid automobiles (PHEVs) imposed CO2 abatement costs of roughly $20 per ton, or slightly more than a nuclear power plant. The second was GM's widely publicized announcement that the Volt would get 230 miles per gallon. The third was a special report from titled "Volt vs. Prius: What's the better deal?"

After reading and thinking about these articles for a few days, I went to work on an Excel spreadsheet to analyze the differences between HEV and PHEV options and reduce them to a simple customer oriented financial analysis. The summary results I share in this article demonstrate once again that the glittering promise of PHEVs is nothing more than post-modern mythology that does not stand up to even basic economic analysis. For readers that take issue with my assumptions and want to test their own theories, a copy of my Excel spreadsheet is available here. The server copy is write protected but you can save it to your system using a different name and check my work at your leisure.

Gas Price Assumptions

Since 1999, the average annual increase in the price of crude oil has been roughly 17.5%. Based on the following graph that I've used in other articles, I believe oil prices will stabilize around $80 per barrel later this year and continue to move upward within the price channel until we hit the next inflection point.

The following table shows potential future gasoline prices over the next 10 years based on three scenarios: a 17.5% annual rate of increase like we've had for the last decade; a 25% annual rate of increase and a 32.5% annual rate of increase. Any way you look at it, the numbers are incredibly ugly. We cry and complain that gas prices peaked at $4.50 last year. Can you imagine the pain and economic dislocation arising from $12.50 gas prices 10 years out? 

Calendar 17.5% Annual 25.0% Annual 32.5% Annual
Year Gas Price Increase Gas Price Increase Gas Price Increase
2010 $2.94 $3.13 $3.31
2011 $3.45 $3.91 $4.39
2012 $4.06 $4.88 $5.82
2013 $4.77 $6.10 $7.71
2014 $5.60 $7.63 $10.21
2015 $6.58 $9.54 $13.53
2016 $7.73 $11.92 $17.92
2017 $9.08 $14.90 $23.75
2018 $10.67 $18.63 $31.47
2019 $12.54 $23.28 $41.70


Since the goal of this article is to debunk prevailing PHEV mythology, I'll assume that oil price increases over the next decade will mirror the 17.5% rate we experienced in the last decade.

Other Key Assumptions

In a recent Instablog titled "Lies, Damned Lies and MPG Claims for the Volt" I criticized GM for claiming 230 mpg for the Volt because any attempt to combine electric vehicle "EV" range with internal combustion engine "ICE" range is meaningless. I also speculated that the easiest way to get to a 230 mpg figure for the Volt was to assume a 46 mile daily commute, a 40 mile EV range, and 30 mpg fuel economy for ICE powered driving. While I found the numbers arbitrary for a public fuel efficiency announcement, they didn't strike me as inherently unreasonable. So I've decided to follow GM's lead and use the same basic assumptions for this article: 

Daily driving distance 46 miles
Annual driving days 250 days
Annual vacation trips 1,000 miles
Total annual mileage 12,500 miles
Basic ICE fuel economy 30 mpg
Baseline electricity cost $0.115 kWh
Inflation rate for electricity 4.0%
Discount Rate for
     present value calculations

Minimum car ownership period 5 years
Maximum car ownership period 10 years

My Baseline Scenario

As a baseline scenario I started with a $20,000 new car equipped with a standard ICE that would get 30 mpg and use 417 gallons of gasoline per year. A consumer who bought the car for cash, used 417 gallons of gas per year, and sold the car after five years for 35% of his initial purchase price would have an undiscounted total cost of ownership of $21,671 for the five year period. Stretching the ownership period out to 10 years and reducing the resale value to 10% of the purchase price results in an undiscounted total cost of ownership of $46,090. To keep things as simple as possible, I ignored maintenance and assumed all batteries would last for the entire service life.

The HEV Alternatives

I then used the same basic assumptions to calculate the total cost of ownership over five and ten year periods for: 

  • A $21,000 micro hybrid that would improve fuel economy by 8%;
  • A $23,000 mild hybrid that would improve fuel economy by 20%;
  • A $26,000 full hybrid that would improve fuel economy by 40%; and
  • A $32,500 PHEV (after tax credits) that would offer 40 miles of EV range and 30 mpg fuel economy from its ICE.

The five and ten year total cost of ownership values are summarized in the following table. 

  Purchase 5 Year Resale Undiscounted
  Price Fuel Cost Value Cost of Ownership
Pure ICE $20,000 $8,671 ($7,000) $21,671
Micro Hybrid $21,000 $7,977 ($7,350) $21,627
Mild Hybrid $23,000 $6,936 ($8,050) $21,886
Full Hybrid $26,000 $5,202 ($9,100) $22,102
PHEV 40 $32,500 $3,291 ($11,375) $24,416
  Purchase 10 Year Resale Undiscounted
  Price Fuel Cost Value Cost of Ownership
Pure ICE $20,000 $28,090 ($2,000) $46,090
Micro Hybrid $21,000 $25,843 ($2,100) $44,743
Mild Hybrid $23,000 $22,472 ($2,300) $43,172
Full Hybrid $26,000 $16,854 ($2,600) $40,254
PHEV 40 $32,500 $9,070 ($3,250) $38,320


This table is a very simplistic presentation that assumes a buyer will pay cash for his vehicle and doesn't worry about details like the time value of money. Nevertheless, it shows that a PHEV will represent a 12.5% up-charge for customers who buy with a 5 year ownership horizon and a maximum savings of 17% if they buy with a 10 year ownership horizon. 

To take the level of sophistication up a notch, the following table calculates the discounted present values of the five and ten year total cost of ownership using an imputed interest rate of 7.5% per year. While it's easy to argue that a 7.5% discount rate is far too low for an individual's financial transactions, the table makes it clear that a PHEV will represent a 24% up-charge for customers who buy with a 5 year ownership horizon and a wash for customers who buy with a 10 year ownership horizon.

  Purchase 5 Year Resale Net Present Value
  Price Fuel Cost Value Cost of Ownership
Pure ICE $20,000 $6,855 ($4,876) $21,979
Micro Hybrid $21,000 $6,307 ($5,120) $22,187
Mild Hybrid $23,000 $5,484 ($5,607) $22,877
Full Hybrid $26,000 $4,113 ($6,339) $23,774
PHEV 40 $32,500 $2,624 ($7,923) $27,201
  Purchase 10 Year Resale Net Present Value
  Price Fuel Cost Value Cost of Ownership
Pure ICE $20,000 $17,550 ($970) $36,579
Micro Hybrid $21,000 $16,146 ($1,019) $36,127
Mild Hybrid $23,000 $14,040 ($1,116) $35,924
Full Hybrid $26,000 $10,530 ($1,262) $35,268
PHEV 40 $32,500 $5,825 ($1,577) $36,748

Sensitivity Factors

The most critical sensitivity factor for the total cost of ownership calculations is expected future gasoline prices. In general, ultra-rapid escalation of gas prices makes PHEVs increasingly attractive on a net present value basis, but only at the cost of imposing a crushing burden on the global economy.

The second major sensitivity factor is the imputed interest rate used for the present value calculations. As the discount rate approaches credit card rates of 15%, PHEVs become less attractive. 

The third major sensitivity factor is battery cost. The current Federal tax credit for electric drive vehicles is the rough equivalent of a $500 per kWh discount on the purchase price of the batteries. For PHEVs to become truly cost-competitve with micro, mild and full hybrid vehicles, the industry will need to shave another 50% off current heavily subsidized price levels. Unless the government decides that it wants to subsidize PHEV battery costs in perpetuity, battery prices will eventually have to fall from $1,000 per kWh to roughly $250 per kWh, which may indeed be possible given another decade of battery chemistry research and manufacturing technology development. Unless and until we see massive reductions in battery costs, however, PHEVs will be little more than vanity purchases for the green elite who can pay big premiums for status symbols. 

We've all heard the mythology that PHEVs will save users buckets of money by using cheap electricity instead of expensive gasoline. The hard reality is that none of the HEV or PHEV options is a money saver for the consumer. To make matters worse, all of the planned PHEVs will be considerably less convenient and reliable than their less glamorous cousins. While I grew up with the family car and have a difficult time imagining life without one, it may be time for the industrialized world to consider a paradigm shift of the type proposed by Seeking Alpha contributor Bill James in his recent article "Personal Rapid Transit: Preempting the Need for Oil in Urban Transport

The days of using any kind of energy to move 3,000 pounds of steel and 200 or 300 pounds of passengers at highway speed are over! We've just been avoiding that particular reality because it's unpleasant. 

In a world where 6 billion people are working overtime to earn a small piece of the lifestyle 500 million of us take for granted, the idea that we can continue to waste any natural resources, including water, food, oil and battery materials, must be crushed. Personal rapid transit may not have all the comfort and convenience we've come to expect from a car, but it beats the heck out of forcing huge segments of America's working population to rely on electric bicycles and scooters.

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981.

See original news item: AltEnergyStocks, Aug-19-2009  
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Comment by: Joe Pawling (Sep-26-2011)   
I'm late to the party, but I have been wrestling with this very subject. Is it more cost effective to but a 41 mpg gasoline vehicle versus a electric or hybrid at a premium price. Is there any way of getting that Excel sheet? It is no longer available. Or has anyone done another comparison with today's fuel prices? I would like to add more mileage to the equation, I believe it will benefits the hybrid vehicle as far as a break even point. My findings where about the same for a hybrid, 5 years even, 10 years you're saving. But want about BEV's? Ford Focus.
Comment by: Anonymous (Feb-9-2011)   

Your analysis is generally pretty good and is similar to my own analysis. The difference is that you're wrong about re-sale values. Go look up the resale value of a prius right now. Not estimates, actual re-sale values. Then re-apply the real data to your estimates. You'll find that right now under your (mostly very good) assumptions, there's nothing in it or it's slightly positive for the prius. I expect the same re-sale value to hold with plug-ins as they become available.

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