Cars are one of the major sources of pollution in the world and a huge drag on people’s wallets. Right now we’re at the start of a massive shift in car technology. If prices for batteries and EV motors continue their downward trends then new EVs will MSRPs similar to gas cars sometime between 2022 and 2024. This is really quite soon and as people start to understand that EVs have much lower maintenance and fuel costs than gas cars the transition may be quicker than many people are currently anticipating. How this will affect the prices of cars, both new and used is a very interesting question that has a direct impact on your financial life. Should you buy a used Tesla now? How about a hot new Dodge Hellcat or a “practical” Honda Civic? Read on to find out.
What’s happening to EV Prices?
We can already see one outcome of the quick advance of EV tech in the fast depreciation of old EVs. Leaf’s that cost over $25k after rebates 6 years ago are now selling for $5k, Tesla’s that cost $100k are now selling for $30k. This level of depreciation on cars with just 50-80k miles on them scares a lot of people away from EV purchases. I expect it will just keep happening to current EVs as well, but the reality is that it may be even worse for new gas cars.
In 5-10 years what will a current EV go for used when when brand new EV’s offering similar range are selling for $20k new? What price will people pay for a used Bolt EV with 250 miles of range when there are new EV’s with 500+ miles of range selling for $35k? Will someone want an old Tesla that takes 20 minutes to add 130 miles of range at a supercharger when new models can add the same amount in 5 minutes?
While the motor/battery is the main cost component in a car there are lots of other parts that have value. The body, wheels, glass, etc. is all worth money. This means that people won’t just throw old EVs out, but their prices may fall just as much as the prices of today’s 2012 Nissan Leaf’s.
It is also possible that retrofit companies will start coming up that can add new batteries/motors to existing EV bodies. This could give them the same sort of performance as new EVs for a lower price. Currently there aren’t a lot of service stations that specialize in retrofits like this, but it’s actually not all that hard to learn. The main issue is that batteries are currently still expensive so retrofits are pricey. As batteries become cheaper and demand for service on gas cars drops I expect a number of savvy service station owners to start offering battery/motor upgrades to customers.
How Will the EV Transition Affect Gas Cars?
Another consequence of increased EV ownership is that demand for gas will drop. This will likely cause the price of gas to drop, but there is a of floor to how low it can go. This floor comes primarily from two causes. First off, there are some sources of oil which will simply be unprofitable if the price of oil falls too far. Oil from the tar sands in Canada may have already passed this point and be surviving on investor cash and government bailouts. This means that if oil prices drop too low then supply will also drop. This dropping of supply may the result in a boost of prices that enables high cost oil extractors to operate again, but such a boost could also push more people to switch to EVs thus dropping demand further.
The other factor in a price floor for oil is that it has uses beyond just fueling cars. While over half of the world’s oil is currently used for transport a large amount of it goes to heating homes and producing things like plastics. As more people switch to EVs and the price of oil drops these other oil consumers might take advantage of the low price to increase their consumption. This would provide another upward pressure on the price of oil. So in the end, a surge in EV ownership may not drop gas price as much as people currently think.
Another outcome from less total demand for gas is that a lot of gas stations will close down due to lack of business. As it is gas stations make most of their profit on the sales in their convenience stores or through add-ons of additional services, such as car washes. If people are stopping at them less to fill up, then they’ll be consuming less of these other services as well and some stations will be force to close.
A few old gas stations may find new lives as EV charging stations, but there won’t be tons of demand for this because so much EV charging gets done at home. It is likely that there won’t be lines for gas as stations close down, because a second station would open up to serve that demand and profit on selling lottery tickets and coffee, but there will be fewer places to fill up. This lowered number of stations means less competition and increases the chances that the ones still operating will try and overcharge customers for gas and gas car maintenance.
So how will all of this impact gas car sales? Certainly gas car sales will drop as people choose to buy EVs over gas cars. This will likely reduce the number and variety of new gas cars that are made as automakers will have trouble finding enough demand to make all the gas models they currently produce. I’d expect that used gas car prices would drop as demand for gas cars drops, but this reduction in new gas car models could help keep the prices of used models higher for a while. Still eventually the price of used gas cars will hit a cliff too as gas/maintenance becomes harder to find and new used/EVs also fall in price. Who knows, maybe old gas cars will start being retrofitted as EVs as well?
Wrapping it up
The million dollar question is when will demand for gas cars finally dry up. I’ll leave the exact answer to this to an enterprising economist who wants to really get their hands dirty with the data. I am confident that the EV transition will be in full swing in under a decade though, and that this will result in far lower resale prices for used gas cars. I’m also confident that EV tech will continue to improve and used EVs will also have high depreciation.
We may well be entering a world where car depreciation starts looking more and more like computer depreciation. This just makes the old FI advice to buy a well used car even stronger. If you really want to profit greenly you should be buying a used car that you expect to be worth about $0 in 6 years time. At that point you can recycle it and have your pick of one of many heavily depreciated EVs.