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estimates a potential cut in the range of $4,000 to $5,000, noting that tax breaks for ethanol producers were recently repealed, so a reduction on the fuel-efficient vehicle incentives could also be on the table.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.