Tesla Model 3: How Will Low Oil Prices Affect The New Car?

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Electric vehicle maker Tesla is gearing up to unveil its much-awaited Model 3 in March. The company will also start taking pre-orders for the vehicle around the same time. The Model 3 unveiling comes at a time when oil prices have tumbled to the lowest level in years. The oil price has a huge impact on buyer preference when it comes to buying a car. For instance, electric vehicle sales in the US declined by 6% in 2015 even as the total US car sales jumped by about 6%.

Cheaper EVs with lower ranges to take a big hit

How will the low oil price affect Tesla’s upcoming Model 3? First thing, gas prices fluctuate over time, and there is no guarantee that it would remain at the current level long into the future. Second, even though Model 3 would be Tesla’s cheapest car it is unlikely to go up against the likes of Nissan Leaf. With a base price of $35,000, low operating costs, and high-end specifications, it will compete with Audi A3, BMW 3-Series, and Mercedes Benz CLA250.

Elon Musk recently said that plunging oil prices will definitely impact the electric vehicle industry, but Tesla cars will not be the worst affected. The Palo Alto-based company’s vehicles are better placed than cheaper rivals to weather the effect of the oil slump. Cheaper electric vehicles with low ranges will take a big hit. Tesla’s significant product differentiation means its Model 3 will be a little less affected.

Tesla Model 3 will still do well

It was clearly visible in electric vehicle sales last year. In 2015, the US EV sales fell nearly 6%, while Tesla’s sales rose 50% YoY. Excluding Tesla, the US EV sales were down 16.5%. Elon Musk is bullish about the Model 3 prospects. He believes the Model 3 will do well even if the economics favor gasoline. Seeking Alpha contributor Bill Lobner did a detailed analysis of operating costs and found that the Model 3 would do well even if gas prices drop below $1/gallon.

Tesla shares jumped 1.03% to $190 in pre-market trading. The company’s current market valuation hinges on the success of Model 3.

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