The External Factors Fallacy
Horace Dediu, 10/5/2016
The External Factors Fallacy
(This is Part 2 of a multi-part series by Horace entitled "Modular Revolution." The first entry is here
When faced with this “hybrid anomaly” the tendency is to look for a bogeyman, a culprit that upset best laid plans. The analysis that follows looks for outside interference or a malfeasance that defeats a positive outcome.
The bogeyman analysis would go as follows: In 2015 the hybrid market barely reached 10% of what was expected of it ten years earlier. In Graph 3 we saw the lack of speed (so far) of adoption of hybrid technology relative to a few earlier technologies. We can’t account for this shortfall because there are fewer cars sold overall. We can’t account for the shortfall with alternative electric cars picking up the slack from hybrids. We can’t account for it through differences in regulation or subsidization. We can’t account for it with a limited, portfolio. We can’t account for it with decreasing performance in the vehicle fleet.
The only remaining option is to blame the price of gas. Surely, as oil prices fall, demand for the economic value of hybrids falls as well and thus hybrid sales.
To the data: Graph 4 shows how gasoline prices changed throughout this period. A pattern seems in evidence: oil prices fell dramatically during two periods: in 2008 and 2014/2015. During both those periods hybrid sales contracted. The conclusion is clear: hybrid cars are entirely at the mercy of oil prices. But is this correlation also causation?
Here is why this is not only a poor correlation, but also a poor cause.
- When hybrid sales grew fastest oil was quite cheap. The period 2000 to 2005 saw oil at far lower price than the post-2014 crash. In other words, cheap gas meant high hybrid sales. Anecdotally, initial hybrid buyers rallied to the Prius because of its green credentials and not its low operating cost. Early buyers were more likely to be very wealthy. Just like when the initial growth in automobiles between 1886 and 1914, the price of hay had little to do with car growth. Production methods led to price reductions and mass adoption in spite of a lack of infrastructure for fueling, roads and service.
- When gas prices rose post-recession in 2009 and 2010, hybrid sales kept falling, all the while gas car sales rose. Here again, a counter-indicator: gas prices rising and hybrid car sales declining.
- Although gas is now at a 10 year low, hybrid and EV cars are only at four year lows. Electric drive sales in 2015 and $60/bbl are twice 2008 levels at $120/bbl. We have not seen a complete abandonment of hybrids in times of cheapest gas.
- When we look at the market in Japan, the birthplace of hybrids, hybrid sales continued to rise through the collapse in oil pricing reaching 30% of the market with only a decline in the last year. Simultaneous to the decline in the US, Europe sales to grow (see Graph 5). European gas prices are less sensitive than the US due to higher taxes, but they did drop nevertheless. Europeans are buying more hybrids than ever.
- Although we can assume that gas prices do influence the choice of car, we believe that consumers approach car buying as a job-to-be-done hire and do not calculate pricing of fuel as part of the total cost of ownership with any degree of enthusiasm. Buyers are buying more Teslas in the US than ever regardless of gas pricing.
- The availability of finance has a far greater impact on the car market overall than the price of oil. As Graph 6 shows, during the credit crisis the car market fell by an existentially challenging 37% [2007-2009]! Relative to credit, oil prices had no appreciable impact.
The correlation of EV/Hybrid sales to gas prices is weak at best. The more serious problem is that searching for the bogeyman assumes a bogeyman causality. The tendency to blame a bad actor for bad outcomes blinds us from seeing for a more probable cause.
In the case of the hybrid anomaly there are far more compelling explanations.
 Tesla management shared an observation that Prius sales initially had a large impact on Lexus sales, alarming Toyota management. They suggested that Toyota had built the car on their lowest cost platform and aimed the price to the lowest price segment assuming that buyers were seeking economy. To the contrary, buyers were replacing luxury SUVs with Prius and putting it “next to a Porsche” in the driveway.