The Tesla Model S MPG Figures Sure are Alluring

First the reported numbers. Various sources state that the Tesla Model S gets combined MPG somewhere between 96mpg and 120mpg.[i],[ii],[iii]

Like most electric cars, Teslas achieve higher miles per gallon equivalent ratings in city driving rather than highway driving. According to the US Department of Energy, the Tesla achieves 124 MPGe in city driving and 115 MPGe on the highway.i

Gas Mileage: Tesla, Toyota PHEVs & the Trouble with Tesla’s ESG Credentials

These are impressive figures in a world characterized by traditional internal combustion cars that recently posted a record fleet-average high of 26 MPG.[iv] That battery electric vehicles (BEVs) are simply “better” has become the overwhelming consensus. Looking at Tesla’s towering market cap, soaring fuel costs, and the mindless fervent following of Teslarati and it becomes all-too-easy to believe that advocates of BEVs “must know something.”

We saw this bias emerge in a Wall Street Journal article reviewing the mechanical twin of the Kia Telluride, the Hyundai Palisade. The author suggested that the vehicle, a large internal combustion engine (ICE) SUV, offered terrific value for the money.

Unfortunately, the review of Hyundai’s large SUV tumbled into an opinion piece on the increasingly untenable belief that BEVs will naturally overwhelm ICE vehicles due to their mechanical and environmental superiority.

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The author, like many, suggests BEVs offer incredible improvements in MPGs and near-magical environmental benefits by using electric energy instead of gasoline. This message is mixed with the factually correct observation that there is a coming wave of BEVs from OEMs around the world. This will rapidly increase consumer choice and create enormous competitive pricing pressures in a sector that has, to date, largely been dominated by one manufacturer.[v],[vi]

But that first part – better for the environment and cheaper – rests on the assumption that in the future “…the average EV will be cheaper to build than the average IC powered car, due to steep declines in the cost of batteries.” The author knocks the big Hyundai SUV because filling it up with gas, with its “…tailpipe hanging out [will be] uncool.”

The author goes on to wonder “how many bitcoins it will take to fill the [Palisade’s] 18.8 gallon tank.” What that tells this writer (Matt) is that the automotive journalist is “whole-hog” on BEVs for their environmental benefits while seemingly unaware of the fact that Bitcoin, whatever its uses may be, comes with an environmental cost exponentially higher than, well, money.

Bitcoin Average Energy Consumption per Transaction Compared to that of Visa[vii]

Bitcoin Average Energy Consumption per Transaction Compared to that of Visa

And herein lies the gripe. That is a pretty big statement made without evidence. And that seems to be the sum of our thinking lately. I’m going to write a brief and wholly inadequate rebuttal using some data from the EIA, research from a pro-environmental Danish investigative team and data from the Environmental Protection Agency.

Like many, the view that BEVs are simply going to overwhelm ICE vehicles with lower manufacturing costs and higher MPG ratings is as popular as it is empirically difficult to solve for. Notes on the WSJ article’s assertions:

  • The Palisade’s MPG estimate that the author suggests could “come from the second Bush administration” are not due to a lack of R&D engineering, innovation, and technical prowess at automakers
  • Rather, vehicles sold in the US contain an ever-expanding array of ultra-light materials to reduce weight and improve efficiency
  • Unfortunately, what efficiency in materials weight giveth, the safety and comfort features the author extolls, combined with Americans’ preference for ever-larger vehicles (part of safety) has largely taketh away
  • JD Powers wrote a simple summary explaining how our understandable preference for “more surviving” and “more comfortable” has driven offsets in what would otherwise be vast improvements in MPG
  • Check out the EPA’s chart below showing that despite a >75% increase in horsepower, US vehicles’ MPG has nearly doubled since 1975

EPAs chart showing that despite a greater than 75 percent increase in horsepower US vehicles MPG has nearly doubled since 1975

  • Similarly, the EPA’s data shows that for the average new vehicle…horsepower, weight, and footprints are all at record highs primarily due to mix shifts away from smaller sedans to SUVs and pickup trucks

EPA Production Share and Model Year

  • Fortunately, engineers have still managed these headwinds with the same EPA report explaining that new vehicle estimated real-world CO2 emissions are at a record low and fuel economy is at a record high
  • Not bad for a collection of ever bigger, ever heavier, every more powerful and ever safer vehicles

Estimated Real World Fuel Economy and CO2 Emissions

  • Having been discussed ad nauseam, let’s ignore the cobalt, manganese, and copper shortages relative to projected BEV demand and then let’s ignore the dire inadequacy of the grid to deliver rapidly growing electric loads and the increased difficulty of finding enough electricity of any kind, much less the green kind, and just focus on our friend lithium
  • The Danish investigative journalism site “Danwatch” (a pro-environmental group) published a neat graphic showing the incredible amount of lithium needed in a BEV (below)

Danwatch Batteries Contain this much Lithium

  • Danwatch’s scathing article explained how the gold rush for lithium in Chile – location of half the world’s reserves – is destroying the local population and environment due to the egregious water intensity of production
  • The article quotes a professor of engineering at Chile’s University of Antofogasta who explains that “…lithium extraction has been regarded as a regular type of mining…but this is not regular mining – it is water mining
  • If you’re awake, you know water has become an existential crisis in its own right (please read our work on protecting capital amidst war, drought and famine to learn more about drought)
  • The authors also highlight the most comprehensive independent research on the environmental consequences of lithium mining by Arizona State University
  • Examining the period between 1997 – 2017, the study identified “lithium mining activities as one of the major stressors to local environmental degradation”
  • What’s amazing is that the 20 year period covered in that study, ’97-’17, encompasses a time where the bulk of lithium demand growth came from the use of laptops and cell phones and hence totally fails to contemplate the exponential growth in expected lithium demand from BEVs cheerfully anticipated by the mining companies in Chile

EVs Sending Lithium Demand into Overdrive

  • So, the assumptions under the Wall Street Journal’s assertion that BEVs will get ever cheaper with magically green MPG may feel good, that virtue signaling comes at a catastrophic environmental and social cost borne by people around the world – many of them among the world’s poorest

In our piece about the technological advances at Lucid Motors, we revealed that several of our staffers had embraced the BEV and plug in hybrid electric (PHEV) phenomena. We observed that despite being a SUV, one partner’s Toyota RAV4 Prime, which does 0-60mph in 5 seconds, does not require specialized charging stations and is completely devoid of “range anxiety.” So far, that SUV has put up an impressive 93 miles per gallon over 25,000 miles of real-world use.

Considering his PHEV gives roughly the same MPG as the Tesla, can cover long ranges without worry and uses a battery that is only 24% the size of the Model S, it raises some interesting questions. Why is the US racing to subsidize and embrace a technology that requires us to completely overhaul the US electric grid and refueling infrastructure? If we can get 93 MPG from a plug-in hybrid SUV that uses a quarter of the lithium of a standard range Model S that gets ~110 MPG, would we not be better off with 4 PHEVs for every 1 BEV?

Like so many issues today, I am left wondering “where is the middle ground?” Why do we feel compelled to move to bipolar extremes? Would a proliferation of hybrid vehicles and PHEVs not serve the world better with far less strenuous demands on mining and already overtaxed infrastructure?

In our piece Is it too Late to Buy Oil Stocks?, we quipped that environmentalists had been given a stark choice. “Faced with the choice of making difficult changes in lifestyle or getting a government subsidy to buy an electric sports car, the sports car won out.” In that piece we cited work from GMO, run by Jeremy Grantham an investor-environmentalist, which also highlighted the chinks in the BEV narrative’s armor.

If you think I’m just talking our book because I’m worried BEVs are going to wipe out demand for oil, on which we are unabashedly bullish, you would be mistaken. Read our piece on the IEA’s Net Zero 2050 report. Our work explained, using the IEA’s own words, that politicians around the world appear to have completely misrepresented the researchers’ conclusions.

The IEA’s report did not suggest, in any way, that modern society could cease investing in energy. Rather, it laid out a pathway to net zero that required an array of shockingly difficult and collective decisions by governments around the world. In our view, the IEA’s Net Zero report was the single most bullish piece of research on oil we had ever read.

If I have any serious worry, it came out in our recent piece Equity Positioning, Sentiment and the Disposition Effect. In that White Paper we explained that the mania around BEVs had lowered the cost of capital for electric cars. This, in turn, stimulates epic investment in producing…electric cars.

That may seem benign, but as we explained, valuation and capital allocation have consequences. The attention and relentless capital allocation to BEV makers mean companies like CF Industries, one of the world’s largest makers of fertilizer, have meaningful disincentives to add capacity.

This is an investment newsletter that specializes in using data-driven analysis and behavioral finance to put current markets into historical context. Our priorities are capital preservation and compounding. To the degree this message is intellectually dissonant with your beliefs, please know I do not mean to upset anyone. This is the “rants page” where I intermittently come to spill some ink.

We are an open-minded team and would love to hear from you. As always, thank you to our many subscribers for their support.

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.
The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra for anyone seeking out more information related to the topics above.


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September 20, 2022 |

September 20, 2022

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