Publications: Notes at the Margin

Oil's Third Rail (February 19, 2024)

 

Electric vehicle (EV) sales have fallen in recent months. Auto manufacturers have reduced investment in plants and cut production runs. The declines have been attributed to market saturation, the higher price of EVs, concerns regarding charging station availability, and other issues. The key explanation, though, has been ignored: gasoline prices. A close look at the data suggests that decreasing prices have undercut EV sales.

 

However, gasoline price changes cut two ways. The data also reveal that gasoline purchases today may be more sensitive to the availability of a clear substitute: electricity. Evidence from California, the state with the largest number of registered EVs, indicates an upward shift in consumers’ sensitivity to prices. Their heightened sensitivity could increase over time as consumers owning EVs and conventionally fueled vehicles adjust their use in response to petroleum price fluctuations. This trend could spread to the commercial sector as EV and hybrid vans and trucks become more common.

 

The greater sensitivity of consumers to motor fuel price fluctuations will not be limited to the United States. Consumers in Europe, Asia, and especially China with access to petroleum and electricity-powered vehicles will likely develop the same sensitivity to oil prices. This sensitivity will almost certainly rise over time, which will diminish the oil producers’ ability to push crude prices higher.

 

For years, politicians and economists have warned of “third rail” issues when discussing unpopular policy changes such as cutting government-provided benefits. The reference is to the highly electrified rail running beside train tracks in many subway systems, which is deadly if touched. Today, consumer sensitivity to high oil prices has been heightened by access to EVs and hybrid vehicles and thus may become oil’s “third rail.”

 

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