Cheap gas and weaker US rules for fuel economy aren't going to help Tesla sell more electric cars

Cheap gas and weaker US rules for fuel economy aren't going to help Tesla sell more electric cars
Tesla Model 3

Hollis Johnson/Business Insider


The Tesla Model 3.

  • Tesla must confront a world in which gas prices are collapsing amid the COVID-19 pandemic and the US government just weakened fuel-economy standards that had been established under the Obama administration.
  • The company could manage one of those developments, but having two occur at the same time could be challenging.
  • Fortunately, the electric-vehicle market has expanded greatly since the 2009 financial crisis, and Tesla has come to dominate it, so it should be able to manage its difficulties.
  • Visit Business Insider's homepage for more stories.

The electric car has one intractable enemy that can defy all the innovation in the world: low gas prices.

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It's actually remarkable that EVs have gained any market share in the past 10 years, given that the US federal gas tax hasn't been raised since the 1990s. Consumers on budgets can do the math and discover that buying an electric vehicle for a higher sticker price than a gas-powered vehicle won't pay off for years.

And that was when gas was a lot less cheap than it has been historically in the US. With oil falling to $20 a barrel and petrol dropping to less than $1 per gallon in some parts of the country - the price deflated by a COVID-19 demand collapse - the value proposition for an EV dissipates.


Tesla was already looking at a demand ebb due to a $7,500 federal tax credit phasing out. So cheap gas in America isn't going to help the company's cause.

Adding to the challenges is the Trump administration's rollback of federal fuel-economy regulations. The upshot of the new EPA/DOT rule is that automakers would have to achieve an average fleetwide fuel-economy standard of about 40 mpg by 2026, versus a previous, Obama-era target of 46 mpg.

The Trump administration's ruling divides the auto industry

Gas price coronavirus

Julio Cortez/AP Photo

Gas prices at a gas station in Brandon, Mississippi on March 31, 2020.

The ruling has divided the industry, without half of carmakers deciding to stick with a more strict, California standard and half pledging to follow the Trump administration's rules. California has a waiver from the national rules, granted in the 1970s, that it intends to preserve to set its own standards - and if Trump decides to go to the mattresses on it, a legal case could end up with the Supreme Court.


Tesla obviously doesn't need to worry about these rules at all because it sells only electric vehicles. But the company does need to consider how many more EVs would be sold in a 47 miles-per-gallon world than a 40 miles-per-gallon world. You might think that with many other automakers selling EVs in a 47 miles-per-gallon framework, Tesla would be up against intense competition. And while that's true, Tesla would also be operating in a more mainstream EV market, one that's much more robust than the current version, where only about 2% of global vehicle sales are electric.

In the end, you want to be fighting for share in a large market, not a tiny one.

Cheap gas plus weaker fuel-economy standards is a double-whammy

Elon Musk

Jae C. Hong/Associated Press

Tesla CEO Elon Musk.

For Tesla, cheap gas plus weaker fuel-economy standards is a double-whammy. I don't think it hurts the company's ability in the US to continue to sell expensive luxury vehicles. But it does harm Tesla's growth into less expensive mass-market cars, and it could undermine its incipient pickup-truck business.


The Tesla Cybertruck has plenty of appeal in a $4-a-gallon environment, because full-size pickups aren't noted for great MPGs. But with gas at $1, there are far fewer reasons to take a chance on an experimental truck.

So two things have happened that each on its own isn't overwhelmingly negative for Tesla: You can have a weaker MPG standard and still offer an EV value proposition if booming global demand for oil drives up gas prices; and you can have cheap gas and get compensation if rising fuel-economy standards make EVs more commonplace and accepted among consumers.

But if you have cheap gas and lower fleet MPG standards, then if you're Tesla, the next few years could be quite difficult.

There is one positive in all this, however. Tesla's success has convinced the world's major traditional automakers to up their EV game. Volkswagen, in the aftermath of its Dieselgate scandal, has shifted much of its research-and-development efforts to EVs, and General Motors intends to launch 22 new EVs in the next three years. So while oil prices and federal regulations are problems, they aren't unavoidable. A massive pullback from electrification is unlikely, at this point.

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