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China's Oil Appetite to Charge Electric Car Market

Stocks in this article: AONE HEV VLNC PPO SQM JCI ABAT NSANY GM F TM

Based on the recent three-year period, which incorporates a boom-bust-boom cycle on crude, Walters observes a 96% correlation between gasoline and crude oil prices.

While electric vehicle demand looks like it's poised to pop by year-end, cuts to federal tax incentives for the vehicles could tap the brakes.

"As we get further along election cycle, cost expenditures at the federal level are being scrutinized a lot," said Center for Automotive Research director Kim Hill. "I think there's resistance to putting money into programs on a lot of fronts."

Meanwhile, Cheng of A.T. Kearney notes that "without some of these tax credits, the cost of plug-in hybrids would be "prohibitively high" -- mainly due to the cost of the large battery pack required in the vehicle to sustain its propulsion. He estimates that gasoline prices would probably need to approach about $8 a gallon or levels similar to those in Europe before buyers, aside from the early adopters and those interested in making a statement on their commitment to environmental sustainability, would buy plug-in hybrid electric vehicles like the Nissan (NSANY) Leaf and hybrids from automakers such as GM (GM) and Ford (F).

"It would be relatively safe to say that if incentives were eliminated, the total cost of ownership for plug-in electric hybrid vehicles could push many potential buyers away," says Cheng.

Wall Street Strategies analyst David Silver estimates a potential cut in the range of $4,000 to $5,000, noting that tax breaks for ethanol producers were recently repealed, so a reduction on the fuel-efficient vehicle incentives could also be on the table. It takes about 24 months of buying gasoline, or 200 miles a week, to make up for the difference between the cost of a hybrid vehicle when compared to a "normal" vehicle, adds Silver.

Right now the federal tax credit for plug-in electric drive motor vehicles that qualify for such incentives has been between $2,500 and $7,500 and limited to 200,000 vehicles for each manufacturer, according to Cheng. That would be a maximum of $500 million per manufacturer at the low end or $1.5 billion per manufacturer at the high end.

"Over time, if plug-in hybrids go into mass production, you would expect to see economies of scale drive down the overall cost -- perhaps to a point where government incentives would not be required -- but that might take five to ten years," said Cheng.

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