The Economics of Electric Cars
By Arnold Kling
I have begun reading Startup Nation, a book about Israeli entrepreneurialism. Unfortunately, the first anecdote is about an attempt, requiring huge capital commitments and considerable government intervention, to create an infrastructure for electric cars. The idea is to build a set of charging stations that would be comparable to gas stations, where you can swap out a drained battery for a new battery in the time it would take to fill up a tank.
Here is how I think about the economics of this, comparing the gasoline car with the electric car.First, assume that oil is going to be used to produce energy for either car (I will relax this assumption later). Then the two technologies are:
a) Refine the oil into gasoline, distribute the gasoline to filling stations, store it in gas tanks, and convert it to electricity as needed using automobile engines.
b) Convert oil into electricity at the oil refinery, distribute the electricity to charging stations using wires, and store the electricity in batteries.
The economic questions are:
1. How much more efficient is it to produce electricity using one big machine at the refinery rather than using many different engines (if the latter were efficient, then electric companies would use lots of little engines)?
2. Compare the loss of using gasoline to transport gasoline to filling stations with the loss of electricity of sending it long distance across power lines.
3. Compare the efficiency of storing gasoline in tanks with the efficiency of storing electricity in batteries.
I assume that (1) and (2) favor the electric car, at least with the best technology for transmission lines. However, I suspect that (3) strongly favors the gasoline engine. When you turn off the ignition in your car, you stop using gas. But when you stop using your electric car, the battery is still going to run down (unless they have invented a battery that differs from every battery I have ever used). Moroever, the materials to make a car’s gas tank probably cost something on the order of $100, but the materials to make a battery for an electric car may cost thousands of dollars. My guess is that gas tanks have a longer useful life and are less toxic when left in a junkyard.
Next, suppose we drop the assumption that oil is the fuel source. Now, it may be possible to use a cheaper source to produce the electricity centrally. That could be an advantage for the electric car. But what is the cheaper energy source? Coal perhaps. Nuclear perhaps, although the price of nuclear energy is difficult to assess, given that much of the cost is driven by regulatory compliance, which in turn reflects fears, many of them legitimate, about safety. But maybe that coal or nuclear power could be used to produce liquid fuels that could power internal combustion engines, and maybe that would be more efficient than switching to electric cars.