Tesla_Supercharging_in_Gilroy

The current environment of cheap gasoline, even if it persists for some years, will not fully derail - and may not even slow down - the trend toward automotive electrification. I know this is counterintuitive, but I believe it’s defensible.

Consider: with gasoline at US$1.50 per gallon, and electricity at $.11 per kilowatt-hour, a gasoline car getting 35 miles per gallon still has higher costs per mile for energy than an electric car getting 4 miles per kWh (as do the Nissan Leaf and Chevy Spark): $.043 versus $.028. In the future, with hopes of renewable energies powering our electrical devices and chargers, the likes of these Ambit Energy rates are likely to become a lot cheaper, decreasing the price of miles per kWh along with it.

With gasoline at US$4, cost-effective electric cars like the Leaf and Spark are by straightforward analysis the lowest-cost new cars, on a total cost of ownership (TCO) basis, available, and the range of 200-mile-range EVs arriving at the $30k point in 2017 (Tesla Model III, Chevy Bolt, others) will be TCO competitive with mainstream cars, even with $1.50 gas. Short-range electric cars will be cheaper than this in this timeframe.

In addition to being at rough cost parity with gasoline cars (and still falling), these electric cars will offer:

  • a pleasant driving performance (faster off the line than comparably priced gasoline cars)
  • alleviation of range anxiety
  • a constantly improving charging network
  • a brand image of being both “green” and upscale
  • the eventual possibility of greater reliability by virtue of having a lot less moving parts and fluids.

All of this is still true at $1.50 gas. And, even if gasoline is at $1.50 now, car buyers considering the 15-year average lifetime of a new car will be happier - if fuel and electricity costs are at parity - to buy the electric because they will anticipate higher gasoline prices in the future. Car manufacturers making long-term plans for their energy mix will be engaging in similar considerations. And although you may disagree, energy analysts I read are talking about the oil bust in terms of years, not decades.

So, I believe that this current low-price-of-energy environment will slow but not arrest or reverse the progress of electrification. This is my first point.

My second is that electrification, if it proceeds, will cause a large increase in the demand for lithium in the medium to long term. This is hardly a unique point; it’s widely believed. But it’s worth going through the numbers at least a little bit to point out how modest of an auto electrification is needed to make the bull’s case for lithium.

Consider: a single 200-mile range EV with a 50kwh battery requires at least 100 kg of lithium carbonate to make. If just 5% of only the American market were to convert this way, an accomplishment on the scale of what major automakers (not just Tesla) are planning, this would be close to a million cars a year and 100,000 tons of lithium carbonate, enough to rock the global market in lithium. It’s some 50% of today’s global lithium production on a product category that hardly existed a few years ago.

Now it’s true that 5% will take time to happen (the timeline Tesla has for the “gigafactory,” in particular, strikes me as overoptimistic). And it’s true that some EVs have batteries smaller than 50kwh (although 20kwh batteries will become increasingly untenable in 2017 and beyond as cost effective 200-mile EVs proliferate). But on the other hand, the USA is not the only market for electric cars, and 5% is not a barrier either.

Remember the discussion above about electric cars being the lowest TCO option in the near future. “Lowest cost” is a powerful driver.

A third point I would like to make: the lithium battery market can absorb relatively large price swings in either direction without its fundamental economics being either ruined or blessed. A kwh of lithium batteries, something which now costs somewhere in the $200 to $400 range to produce (figures vary), and which battery makers hope to push into the $100 range, uses 2kg of carbonate or about $12 worth of lithium.

Let that $12 become $24, or let it become $3, and the economics of battery production and battery storage and battery applications like cars, grid storage, etc, will be only marginally affected. If some particular Andean brine pits happen to be more expensive to produce from than current mines, it won’t break these economics.

So, should you all be packing your bags for Bolivia and Chile? I really don’t know. For one, the bullish case I make operates in a macro, long-term mode. I’m repeatedly struck by how cyclical the mining business is and how often a large-scale fundamentals trend can be totally upended by the particular details of which mine or factory opens when and brings what units of production or consumption into play.

I don’t know nearly enough about the lithium market to make those kind of calls. And also, I don’t know that a lithium production boom will necessarily express itself in a price boom. Maybe all those Andean salt fields are easy to turn on and off and have costs close to current prices, and scaling from 200k tons of carbonate a year to a million tons will be easy and won’t impact prices too much.

Maybe the lithium bull’s case is so oversold that every saltshaker from Rio to Santiago will have a mine in it, and they will between them push prices down the $1k a ton and lose their shirts.

But I do feel very comfortable predicting that the long-term upward trend in lithium demand will continue, and that it is comparatively insensitive to fluctuations, particularly short-term fluctuations, in the price of gasoline and of lithium.

Ari Allyn-Feuer is a PhD student in Bioinformatics in Ann Arbor, Michigan who has an interest in the effect of energy prices on automobile electrification and thereby, lithium demand and pricing.