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Here's how COVID-19 will impact electric vehicle production

Oil markets remain volatile as the coronavirus continues to spread globally. Michael Anderson, University of California’s Berkeley Associate Professor of Agricultural and Resource Economics debates whether we’ll see an increase in demand of gasoline or electric cars post-pandemic. He joins Yahoo Finance's On The Move to discuss.

Video Transcript

JULIE HYMAN: And on this Earth Day, we wanted to take a look at the prospects for electric vehicles right now. Of course, vehicle sales of all kinds are depressed at the moment, but what happens once they start to pick up again? Will we see the same kind of demand for electric vehicles? We are joined now by someone to talk about that. That is Michael Anderson. He is University of California at Berkeley associate professor of agricultural and resource economics. He's joining us from San Francisco. Michael, thanks for joining us.

So what do the prospects look like, especially since, amidst everything else that's going on, we also have gasoline prices that are very, very low? And that's something that has tended in the past to take demand away from electric vehicles.

MICHAEL ANDERSON: Sure. So I mean, I think that, you know, as with many consumer durable goods in the short run, there's definitely going to be a large drop in sales. You know, we know that, first of all, obviously, the impending recession itself is just going to have a direct effect. People don't have as much money to spend in particulars or durable goods or something that people can postpone purchases of. You know, it's not like food or rent or something like that where it usually needs to be paid on a regular basis.

And so that can-- those types of things can see very big drops in sales. So I think during the last-- the Great Recession, for example, vehicle sales dropped by as much as, like, 40%. So I think that-- that's sort of the first order effect that we're going to see, but that affects all vehicles, not just electric cars, of course.

The other sort of complication that's unique to the pandemic, of course, is that people are trying to socially distance-- they're supposed to be, at least in most states. And going to the dealership and actually, you know, sitting there and negotiating over a new vehicle price, which, you know, as many of us know, can be quite a complicated process that takes a while, you know, that's not in the cards right now for most people. And so that I think is sort of, you know, just an additional complication on top of the drop in consumer spending.

And then finally, you know, a factor that you mentioned that's unique to electric vehicles, or EVs, is that gas prices are falling. And so that does-- you know, that does, like, reduce the sort of fueling cost advantage that EVs typically have. That being said, I don't think that it's sort of a-- so the actual numbers, you know, we can go through them if you want. In the long run, I don't think that the drop in gas prices is going to be as detrimental to electric vehicle sales as you might think, just because it's not the sort of main reason that-- the savings in gasoline costs I think is not kind of the main driver of EV sales today and probably won't be in the future either.

RICK NEWMAN: Hey, Michael. Rick Newman here. Another big question regards all the automakers that are not Tesla-- General Motors, Volkswagen, Toyota, and so forth. So to scale this technology to the point that it's really economically affordable for most people, you need the big players, and their budgets are under severe pressure. And there's a lot of concern that they may just have no choice but to scale back research and funding for EVs. What do you think about that?

MICHAEL ANDERSON: So again, you know, I think in the sort of near term, that's definitely-- that's likely to happen. You know, most businesses right now are really concentrating on cash flow, and the automakers all know that sales-- you know, they've already started to drop. They're going to continue to be depressed for a while. And so they're going to want to save money, and you know, one of the things that's going to be sort of easier to cut back on is research and development, postponing launches of new models, things like that. So again, I do think it's going to be a speed bump here that you will see some of these, like--

ADAM SHAPIRO: Michael?

MICHAEL ANDERSON: --EVs planned to come out, though they'll be pushed back.

ADAM SHAPIRO: Pushed back, but what about deals that are already in the works for production now, like Ford and Rivian?

MICHAEL ANDERSON: Yeah, so I mean, I don't know-- so I don't have details on, like-- you know, I'm not-- I'm just going from sort of, you know, basic economic theory and common sense here. I don't have inside channels into the production plans for these automakers. So at some point, yeah, you know, if you've already paid all the fixed costs you've done the development and you're ready to launch, then probably you just go ahead with it, even if you know that sales are going to be depressed. I think this is more thinking forward to, like, 2021, 2022, sort of a little bit further down the line, does some of that stuff get pushed back?

JULIE HYMAN: Michael, just very quickly, what about the role of subsidies for electric vehicle sales in the US? Because we've already seen them come off. Are they just not as much of a factor at this point?

MICHAEL ANDERSON: Well, there's-- I mean, they're still substantial for most of the automakers, right? So Tesla and GM are, I believe, the only two in the US that have completely phased out of the subsidies. Nissan I think may be in the process of phasing out. But you know, I think, again, that's an important, like, point in the sense that, you know, when we think about gas prices, for example, the sort of-- the advantage that EVs have, in terms of lower spending on gas that has been somewhat diminished by the extreme fall in oil prices that we've seen recently.

That advantage is actually substantially less than the $7,500 tax-- federal tax credit, right? So the fact that you have seen Tesla, for example, basically phase out of all of the $7,500 now-- [INAUDIBLE] sell vehicles, I think is sort of a positive sign that Tesla is unique. They are the biggest player in this market. But you know, for what it's worth, they have been able to continue to sell vehicles, even after the $7,500 credit is gone.

JULIE HYMAN: Yes, indeed, they have. Michael, thank you so much for your perspective. Michael Anderson is an associate professor of agricultural and resource economics at the University of California at Berkeley. Thank you so much.