Crude oil has dropped 50% in just 6 months. At under $50/barrel, gasoline is now selling for under $2/gallon in many places. This is a price rollback to 2008 prices – something almost no one expected in early 2014.
It is easy to jump to conclusions about what this will mean for sales of some products. And many analysts have been saying this is a terrible scenario for Tesla, which sells all electric cars. The theory is pretty simple, and goes something like this: People buy electric cars to save on petrol costs, so when petrol prices fall their interest in electric cars decline. With gasoline cheap again, nobody will want an electric car, so Tesla will do poorly.
But this is just an example of where common wisdom is completely wrong. And now that Tesla has lost about 1/3 of its value, due to this popular belief, it is offering investors a tremendous buying opportunity.
There are three big reasons we can expect Tesla to continue to do well, even if gasoline prices are low in the USA.
First, Teslas are great cars. Not simply great electric cars. So quickly we forget that Consumer Reports gave the Model S 99 out of a possible 100 points – the highest rating for an automobile ever. In 2013 Motor Trend had its first ever unanimous selection of the Best Car of the Year when all the judges selected the Model S. The Model S, and the Roadster before it, have won over customers not just because they use less petroleum – but rather because the speed, handling, acceleration, fit and detail, design and ride are considered extremely good – even when comparing with the likes of Mercedes and BMW – and when you don’t even consider it is an electric car.
It is a gross mis-assumption to say people buy Teslas because they are electric powered. People are buying Teslas because they are great cars which are fun to drive, perform well, look stylish, have low maintenance costs and very low operating costs. And they are more ecological in a world where people increasingly care about “going green.” In 2015 consumers will be able to choose not only the Roadster, and the fairly pricey Model S, but soon enough the smaller, and less expensive, Model 3 which is targeted squarely at BMW Series 3 customers. Teslas are designed to compete with all cars for consumer dollars, not just electric cars and not just on the basis of using less fuel.
Second, the market for autos is global and gasoline isn’t cheap everywhere. Take for example Hong Kong, where gasoline still retails for $8.50/gallon (as of 31Dec. 2014.) Or in Paris or Munich where gasoline costs $5/gallon – even though the Euro’s value has shrunk to only $1.20. Outside the USA most developed countries have a lot more demand for oil than they have production (if they have any at all.)
Almost all of these countries offer incentives for buying electric cars. For example, in Hong Kong and Singapore the import tax on an auto can be 100-200% of the car’s price (literally double or triple the price due to import taxes.) But in these same countries the tax is greatly reduced, or eliminated entirely, for buying an electric car for policy reasons to promote lower oil consumption and cleaner city air. So a $100,000 Mercedes E class in Hong Kong will cost $200,000+, while a $100,000 Model S costs $100,000.
Further, outside the USA most countries heavily tax gasoline and diesel in order to discourage consumption and yield infrastructure funds. So even as oil prices go down, gasoline prices do not decline in lock-step with oil price declines. Consumers in these countries have a much greater demand than U.S. consumers for high mileage (and electric) cars almost regardless of crude oil prices. So thinking that low USA gasoline prices reduces demand for electric cars is actually quite myopic.
Third, do you really think oil prices will stay low forever? Oil is a commodity with incredible political impact. Pricing is based on much more than “supply and demand.” At any given time Aramco, or its lead partners such as Saudi Arabia and the UAE, can decide to simply pump more, or less fuel. Today they are happy to pump a lot of oil because it hurts countries with which they have a bone to pick – such as Russia (now almost out of bank reserves due to low oil prices) and Iran. And it helps USA consumers, reducing domestic interest in things like the Keystone Pipeline which could lessen long-term reliance on Aramco oil. And investing in risky development projects like the arctic ocean. Tomorrow these countries could decide to pump less, as they did in the mid-1970s, driving up prices and almost killing the U.S. economy.
Oil prices have a long history of instability. Like most commodities. That’s why a state economy like Texas, where they produce a lot of oil, could boom the last 4 years, while manufacturing states (like Wisconsin and Illinois) suffered. With oil back under $50/barrel drilling rigs will go into mothballs, oil leases will go undeveloped, fracking projects will be stalled and the economy of oil producing states will suffer. Like happened in the mid-1980s when Saudi Arabia once again began flooding the market with oil and exploration and production companies across Texas went out of business.
Most people are smart enough to realize you look at all aspects of owning a new car. There are a lot of reasons to buy Tesla automobiles. Not only are they good cars, but they are changing the sales model by eliminating those undesirable auto dealers most consumers hate. And they are offering charging stations in many locations to make refills painless. And you don’t have to change the oil, or do quite a bit of other maintenance. And you do less damage to the environment. It’s not simply a matter of the price of fuel.
It is always risky to oversimplify consumer behavior. Decisions are rarely based entirely on price. And, as Apple has shown with sales if iOS devices and Macs, people often buy more expensive products when they offer a better experience and brand. Long term investors know that when a stock is beaten down by a short-term reaction to a short-term phenomenon (such as this fast decline in oil prices) it often creates an opportunity to buy into a company with a great future potential for growth.