Commodities markets are on an even wilder roller-coaster ride than the stock market and crude oil is leading the retreat. The AP reports that Thursday’s hit of inter-day low of $54.67 / barrel and closed at $58.24. That there is almost 2/3rds down from the summer’s near $150 peak. TFC Commodity Charts publishes a dandy oil price graphic ,while the EIA puts detailed gasoline price histories online. Unfortunately for conspiracy theorists, gasoline prices have tracked crude oil prices very well in recent weeks. The national average for regular fuel for the week ending November 10th was $2.17; broadly consistent with January 2007 when crude oil was last in the $55-$60 range. Interestingly for whichever automakers stay in business is the little reported fact that steel, copper and other raw material costs have plunged even more rapidly than crude oil. Copper, for example, is falling through the floor.
So, does this mean it is time to ramp Hummer production back up? So far, signs are that most consumers remain gun shy about gas guzzlers. Democrats are beating the drum for massive infrastructure construction projects in the new year, so some relief may be in sight for the work truck market next year. The real story, however, may be the headwinds facing Ford’s European small car invasion, Honda’s new Insight and the believe-it-when-I-see-it Chevy Volt. Even if customers aren’t stampeding back to monster trucks, they might not be as keen on Lilliputian cars and expensive plug in hybrids as they were when $5/gallon seemed to be just over the next hill. We seem to be living in dog years where each calendar year counts for seven.
Let’s see now, my head is attached to my shoulders, brain on and firing. OK.
The IEA released its Oil Report two days ago.
An extract:
The world’s energy system is at a crossroads. Current global trends in energy supply and consumption are patently unsustainable – environmentally, economically, socially. But that can – and must – be altered; there’s still time to change the road we’re on.[1] It is not an exaggeration to claim that the future of human prosperity depends on how successfully we tackle the two central energy challenges facing us today: securing the supply of reliable and affordable energy; and effecting a rapid transformation to a low-carbon, efficient and environmentally benign system of energy supply. What is needed is nothing short of an energy revolution.
For the first time, the IEA included in its analysis a study of the depletion rates of the world’s top 800 oil fields. Why they didn’t include that crucial information in the past we don’t know, but as readers of these pages are well aware, it’s the hole in the bucket that is the very heart of the peak oil study.
The rates they found were high enough to surprise even me: 6.7%[2] for past-peak fields, increasing to 8.6% by 2030 (the end date of the report’s “reference scenario”). Averaged across all fields, the rate is 5.1%,[3] but that includes 3.4% for the very largest fields, 6.5% for the next-largest and 10.4% for the next size down.
http://www.energyandcapital.com/articles/iea-oil-report/782
Oil prices are down now because the World Economy is under assault. But oil production will not be able to feed projected demand, which leads to one conclusion: maybe wait with that SUV.
But this isn’t really a tough question: what’s financing like for cars these days?
This will be the test to see if Detroit survives. If the domestics go back to their old gas guzzler selling ways, they will make some immediate sales gains and profits. However, when the next fuel shock wave hits, people will once again be in a five year to pay for and upside down large sized vehicle worth little on a trade in. It takes fortitude to keep designing and making smaller cars, even if they are not as “hot” as six months ago. I ask you this; if the stock market can girate 900 points in a couple of hours, cannot and will not an oil crisis develope taking gas to $4.00 in the near future?
I have discussed this very issue with a few people that I know. Current gasoline prices, which are now below $2.00 per gallon, are, I believe, an aberration and oil will bounce back up when there is some economic stability in the U.S. and world-wide.
I’d like to think people aren’t that stupid and the Detroit Three aren’t that stupid (strategic pause) but then on the other hand……………..
It’s not a question of if, but when the fuel prices will bounce back up. Unfortunately, Americans in general have an extremely short memory. If fuel prices hold for a few months at current price levels, dealerships will gladly welcome back those that are looking to buy those gas-sucking leviathans. And yes, in a year or so when the prices start ramping up again, they’ll be the first to bitch and moan about how much it takes to fill up a tank in their Yukohoes and how little they are worth due to massive depreciation. And once again, the Big 2.8 will complain that in no way could they have predicted the rise in fuel (again) and will come groveling to Congress to ask for more money (again).
At this point most people are locked into whatever they are driving, thanks to the credit meltdown. The (slight) upside to this short-term decrease in demand is that it extends the lifetime of the overall supply a bit. While I would like to think that this summer’s “unpleasantness” put enough of a scare into the the populous that the market for new gas guzzlers has finally gone away, I can’t say that the realist in me agrees.
i, for one, am not in a hurry to go buy a gas guzzler. i’ve got a subaru for the tough winters up here. because it doesn’t get driven all that much, if it breaks or i crash it, i would definitely think about picking up a 4×4 truck on the cheap…but i’m not pumping my fist in excitement about running out and dropping $30K on a new Ram just because i can afford to fuel it.
for everything not including snow, i drive a GTI, which returns 34mpg average (90% highway, 9% slow, 1% stop and go). now that gas is cheap, do i want a real muscle car instead of a hot hatch? no way. it’s starting to feel like it’s free to drive the GTI (except for $700 timing belt jobs)
It would be incredibly short-sighted to buy more than is needed at the moment, and for 95% of us, large SUVs are more about want than need. Buy small, rent bigger when you need it, and put the money you’re saving on fuel away until we ride this mess out.
It would be better to teach your kids frugality at the pump than have to explain why Christmas will be slim because you had to spend $150 at to fill up your new guzzler (because we all know these cheap gas days are not gonna last).
The illustration is quite apt here.
Gasoline/diesel are incredible efficient energy storage media, to be used when heavy work is required. Pushing along a family car isn’t heavy work, and can be done a lot more efficiently than what Detroit made it out to. (3 ton vehicles, four occupants).
We need the gas/diesel heavy work quotient for heavy machinery, trailer-trucks, construction machinery, train engines, large ships … and that’s what it is going to be reserved for, as we realize the import of the available oil reserves.
As I always say:
Oil reserves do not equal oil production, which does not equal oil exports.
There are more people on the planet than there was when oil was $130bbl. There are more of everything since the high point of oil. Demand has not stopped, but temporarily abated.
Oil prices won’t recover any sooner than dot-com stocks will. It has nothing to do with a slowing global economy; it is the bursting of a bubble. Prices are regressing to the long-term growth curve, which we left off somewhere around $30-$50 a barrel.
Despite lower gas prices, large SUV sales will probably not recover either. In the short-term people are too fearful of higher gas prices (just read the other comments in this thread), and in the long-term the fad is over anyway. Smaller crossovers are the new “SUV”.
Whatever reduction in gasoline prices I save at the pump will be more than taken by taxes – both the state and city where I live are setting up for tax increases, not that they need them, but someone has to pay for their gold-plated benefits and work rules.
Don’t forget federal taxes – the current budget trend is unsustainable, so higher taxes and a lower standard of living is inevitable as our country has to pay back all the money we have borrowed from the Asians and Arabs.
US domestic demand is down 5% year over year, versus the traditional (last 10 years aggregate average) jump of 3%. That is 8% below the trendline, so yes, with demand down that much, prices are sure to fall. Same goes for much of the rest of the world. With fewer monetary resources to spend at the pump across the board (sucky economy, stagnant wages, rising prices on most consumer goods and services-food/heathcare/tuition/etc), I can’t see gas guzzlers making a comeback even if fuel prices remain this low. Which they will not, as others have elaborated upon. Global oil depletion levels (from existing wells) for 2009 are expected to be near 9% (IEA). That means 9% more oil has to be found just to run in place, equivalent to a whole extra Saudia Arabia. Not likely.
Oil prices won’t recover any sooner than dot-com stocks will. It has nothing to do with a slowing global economy; it is the bursting of a bubble. Prices are regressing to the long-term growth curve, which we left off somewhere around $30-$50 a barrel.
You’re right (although I would quibble with you over the price range — I’d say that it’s closer to $50-80ish), but there are a lot of people who are psychologically invested in disaster theory, which means that peak oil, gold fixations and the rest have a lot of appeal to some people.
Many of us were arguing on this forum and elsewhere that $100+ oil was part of a bubble that would pop soon enough, but there are many who simply can’t admit that they were wrong to believe the hype.
Well, gas prices are down, sure, but nobody has any damn money to buy SUVs anymore. I don’t foresee another big-time SUV boom simply because they’re damn expensive, and as I’ve said before, in a country where the average income is around $40k, you shouldn’t be able to see very many $45k+ SUVs. The numbers don’t work out. I think people might be kind of realizing the fact that perhaps, golly gosh MAYBE, they shouldn’t spend so much goddamn money on a depreciating asset just to have a humongous car that can tow the damn boat and camper that they can’t afford.
However, people are greedy idiots, and everybody seems to think they “deserve” all sorts of ridiculous luxuries, so as soon as the money frees up they’ll go back to digging themselves so deep into debt that we might get to enjoy a whole new recession when the bills come due.
It’ll be only temporary, and gas will go back up again, trust me on that.
Why exactly do you choose the phrase “domestics go back to their old gas guzzler selling ways”?
With the obvious negative opinion many have of them, how can you give them the power to rule the market and decide what sells? Do you think they somehow force the gas guzzlers down buyer’s throats?
Or are you suggesting that if people (the highly regarded ‘free market’) start buying trucks and SUVs, the domestics should not sell them? On principle?
Is this what Toyota will do, with the massive gas-guzzling truck plant down in Texas?
Is that what you would do, if you were magically transformed into the CEO of GM or Ford? Show the world how much better you are by refusing to meet the demand for vehicles that will give you much-needed-for-survival thousands of dollars of profit per vehicle sold? Because you’re better, and brighter?
Good luck.
And Ford for one is not abandoning their drive to have a balanced portfolio of desirable, high-quality, fuel-efficient cars and trucks to meet customers’ needs. Lesson learned.
I’m hopefully buying a nice heavy SUV next week. The low gas price is just a bonus – I didn’t expect it and it’s actually hurting my purchase (I live in CAD and am buying in the US – exchange rate has been tracking commodities to a certain degree, so the low gas prices actually cost me purchasing power!). It’ll be a third vehicle for hauling the kids and “stuff” around (or during a more severe winter storm) as we have small cars for the daily stuff…
dkulmacz : Or are you suggesting that if people (the highly regarded ‘free market’) start buying trucks and SUVs, the domestics should not sell them? On principle?
Is this what Toyota will do, with the massive gas-guzzling truck plant down in Texas?
You must have forgotten that while Toyota did indeed start building the Tundra, they did not do so at the cost of development and attention to the Corolla and Camry. Toyota has long been selling compact, fuel-efficient cars which are among the most popular cars in America, and have been for decades. The problem with the domestics is that they discovered a meaty market with big margins, the SUV buyers, and they just made bigger and bigger cars while more or less ignoring the compact and midsize market. Thus, they weren’t protected when the SUV market began to falter and they ended up where they are now. Toyota stopped selling as many Tundras and Sequoias, of course, but people still flocked to the lots to buy Camrys and Corollas. It’s called hedging your bets, and can only be achieved when you have a well-rounded product offering, which the domestics ignored as they only focused on easy short-term profits. Long-term profitability should be the goal of every company, but Wagoner and his boys were so focused on achieving good quarterly results and stuffing their own pockets that all sense fell by the wayside.
In the terms you put it in, it seems that by “free market” you mean “consumer,” and anybody who holds the consumer in high regard is a dolt. The American consumer, on average, carries multiple thousands of dollars of credit card debt. The American consumer, in many cases, owns much more house than he or she can afford because unscrupulous mortgage brokers sold them a mortgage that both parties knew could never be met. The American consumer, the educated one, is suffering under a mountain of student-loan debt. The American consumer is constantly under the threat of layoff from the greedy bastards who employ him or her. The American consumer is a feckless boob who is easily manipulated by advanced marketing techniques, and if you want to place our future in the hands of pig-stupid gimme-gimme idiots, that’s your opinion, but don’t tell me that the consumer is highly regarded. The consumer is constantly manipulated and convinced that he or she needs a mountain of useless crap that will never convey any real benefit to his or her life and oughtn’t be the force responsible for every company’s long-term financial plan.
The domestics should definitely meet consumer demand by producing just enough SUVs to sell to those who think they need them, but to do so while ignoring compact and midsize development, to allow our competitors (Toyota, Honda) to beat the US automakers in the efficiency and innovation game, is the most short-sighted and idiotic thing that can be done. If you simply let present, short-term consumer demand dictate your long-term strategy, you’ll soon find yourself at Uncle Sam’s door with your hands held out.
Gas is still $2.40-$3 here but I didn’t see any shortage of suv’s when gas was $4.50…..maybe some larger cities are a little bit insulated against gas prices, esp if they have (craptastic) public transport as another option?
There are two conflicting forces: On one hand gas is cheap, on the other hand we are (for all intensive purposes even though the two negative quarter benchmark has not been met yet) in a recession with absolutely no consumer confidence.
Scared consumers may buy used (and there are great deals on used SUVs), but many of them will want the reassurance that comes with a new car warranty. They will flock to cheap entry level new cars.
I predict a return to the family sedan. Inline-4 Sonatas, Camrys, Civics, Altimas and Accords should do well. One lasting legacy of the recent high gas prices is that it put the final nail in the coffin for the myth that one is not a real American if their car has four cylinders.
Low gas prices will be bad for hybrids that come at a price premium (i.e. the GM hybrid SUVs), shitty small cars like the Aveo and mediocre small cars like the Cobalt and Focus. Given its level of equipment the Prius isn’t priced badly, put people won’t be paying over sticker or getting on waiting lists for them.
Because of the economy I think that Nissan will have a lot of success with the new $9,990 pricing on the Versa, especially since they can still offer financing, but that could bite them in the ass in the long run with its questionable quality.
The Fit does not rely on gas mileage for sales (which is good because its mileage advantage over the Civic is trivial). It will continue to sell because it drives incredibly well and is very cheap.
The Yaris should also continue to do well with its low price, “saved by 0” and Toyota reputation at this time of consumer fear.
GMAC is no longer lending to people with credit scores below 700 (or is that 740 now?). I am confident that every Hummer and Escalade buyer had a credit score below 700. They are now locked out from buying, even if low gas prices make them want to.
I have to agree with others, oil prices are tied very closely into the global economy. It is thanks to the meltdowns we have been seeing last several months (and years, with regards to home prices) that the pressure on oil prices has been eased. Over a million jobs lost just in the US in 2008, and more jobs that are on the line with bankruptcies or at least downsizing imminent for many big retailers.
This is not like the dot-com bubble in at least one way – even developing nations, folks who are the last in line to buy an HDTV or the latest virtual reality software – need oil and gas. It is a huge part of fertilizer for feeding the world, transporting all the happy meal toys from China to McDonalds, and the list goes on. When oil was trading at $140 a barrel, if you think OUR economy was hurting, imagine living somewhere where a monthly wage is measured in hundreds of dollars instead of thousands.
This isn’t necessarily about SUV’s – there were plenty of them on the road this summer to drive oil and gas prices through the roof, I doubt that many have been retired.
Detroit’s future lies in the perception that people need to buy a new car every three years to replace their “old” one. If everyone decides to stretch this to five or seven years, well, you get what we have now, a huge dropoff in vehicle sales.
I think everyone has seen just how fast we can go from $2.00 to over $4.00 a gallon, and most of us are just waiting for it to happen again (next year, maybe the year after).
With so many people wondering when the next financial shoe is going to drop, it’s hard to justify spending $30K on a new vehicle, no matter how good the warranty is.
Unfortunately for conspiracy theorists, gasoline prices have tracked crude oil prices very well in recent weeks
Let me rephrase that (at least for the Northern California Market)
Unfortunately for market theorists, gasoline prices have not tracked crude oil prices very well in recent weeks
While crude prices have fallen 65% from its summer high retail gasoline price has only fallen 50% from its high.
Fuel costs are just one aspect of vehicle ownership.
People have to be able to buy the vehicle in the first place.
Sales of many SUVs and near-luxury sedans were fueled by home equity loans, cheap credit and subsidized leases. Those sources of financing are either gone, or severely reduced in availability, so I doubt that sales of gas-guzzlers will rebound anytime soon.
The action in the future will be in the $18-24,000 price range, which excludes virtually every brand-new mid-size and full-size SUV on the market.
While crude prices have fallen 65% from its summer high retail gasoline price has only fallen 50% from its high.
I don’t know whether or not your numbers are correct, but regardless, it’s not quite on point.
The price of gasoline is impacted by the costs of refining, distribution, etc., and the supply and demand for gasoline, which do not correlate perfectly to the price of oil.
The price of gasoline is not determined solely by the cost of oil. Oil prices play a significant role in gasoline prices, but they aren’t the only factor.
to Pch101
My percentages are based on peak gas price in my market of $5.19/gal and current price $2.59/gal for unleaded regular.
During the rise in crude prices gas prices pretty much tracked the rise in crude. As crude prices fall there is a significant lag.
Yes I know all the arguments about having to refine oil purchased at $120/bl when current market prices are $55/bl but that mechanism didn’t seem to apply when oil prices were rising. When oil went up $10/bl overnight the next morning pump prices were up 15%.
I don’t have a problem with sellers charging what the market will bear. I do have a problem with being asked to accept that there might be some mechanism working other than the seller pricing the product at what the market will bear.
Unlike most consumer items gasoline is a necessity for most employed Americans. They need to purchase a certain amount regardless of price. When the price triples over a short period of time it can (and will) have a devastating effect on the economy. Unfortunately IMO the contribution of the tripling of oil prices this worldwide recession is not getting nearly the exposure it deserves.
Most of the producers and suppliers of that overpriced oil were second and third world economies. To their surprise and dismay this slowdown will turn around and hurt them more than the first world. They provided a tipping point for what I believe will be a long and painful period of slow economic growth. Perhaps if the rise in oil prices had been more gradual world economies might have adjusted without the painful crash we are seeing.
volvo :
November 14th, 2008 at 11:34 am
Unfortunately for conspiracy theorists, gasoline prices have tracked crude oil prices very well in recent weeks
Let me rephrase that (at least for the Northern California Market)
Unfortunately for market theorists, gasoline prices have not tracked crude oil prices very well in recent weeks
While crude prices have fallen 65% from its summer high retail gasoline price has only fallen 50% from its high.
There is two reasons for that:
1. It takes awhile for the change in oil prices to show up in gas prices.
2. Oil is not the only cost in making gasoline. That is, there are detergents and additives, the cost of shipping and storing the stuff, the salary of the guy who sits behind the thick glass next to the slim jims and energy drinks, etc. That is (fictional numbers) say it takes 1 “unit” of oil and fifty cents worth of other stuff to make a gallon of gasoline. If the cost of that unit of oil drops from three dollars to one, the cost of the other stuff is still fifty cents, so the retail price of gasoline goes from $3.50 to $1.50, not $3 to $1.
Just have to say that I get awfully tired of hearing how the Japanese manufacturers were so much smarter than the US manufacturers in that they specialized in small cars.
People need to keep in mind that Japan is an extremely crowded country where 90% of the people live in 10% of the land. I lived there for two years in the late 60’s. There was only one road that we would call a highway – it ran from Tokyo to Osaka, and, as I recall was built to handle traffic anticipated for either the Olympics or a World’s Fair. Roads were very narrow, parking always at a premium and difficult to find. Most of their transportation was by train (which were great and always on time).
Small cars were a natural outgrowth of their environment and certainly something they learned to do very well.
The constant harping at American manufacturers for giving people what they wanted is more than a bit of a stretch. Even after the shock of the 70’s when they practically fell over each other trying to develop and sell small cars (that few had wanted to buy up to that time), we went right back to big cars as soon as the gas prices fell. And, of course, since that is what we wanted, the Big 3 were only too happy to supply them.
It was the culture of the times – bigger and more powerful were what we wanted and so they damn well made them. The implication that these cars were somehow forced down the collective American throat is nonsense.
During the rise in crude prices gas prices pretty much tracked the rise in crude.
In early January 2002, the price of oil was about $19 per barrel, and the average price of gas in the US was about $1.45 per gallon.
In early July 2008, the price of oil was about $137 per barrel, more than seven times what it had been six years before. The price of gasoline was about $4.17 per gallon.
Using your formula, the price of gas this summer should have been about $10.50 per gallon. I get the feeling that you weren’t writing emails to the oil refiners and gasoline stations, demanding that they raise their prices to keep up with the cost increase.
These costs have never perfectly correlated, and they never will. Given recent events, you had better hope that they don’t.
Not looking for an SUV here, and neither are my friends.
I see more Priora than ever. Hell, now I can’t even recognize my own car in the parking lot because there are so many others that are the same color!
kazoo . . .
Uh, where do you get your sales figures from? Biggest selling vehicle in the US for years have been full size pickup trucks. By a large margin.
Since 2008 is not over yet, the 2007 numbers I get from Forbes.com . . .
Ford F Series — 588K
Chevy Silverado — 527K
Toyota Camry — 399K
Honda Accord — 322K
Toyota Corolla — 318K
Camry and Accord are mid-sized cars. Only one of the top five is a compact. Another example of tossing out a ‘fact’ that’s not factual.
Also, nice redirection. If you meant to say ‘truck-only development ways’, then say it. That’s not what you said, and not what I took issue with. You said ‘gas guzzler selling ways’.
And final point . . . a bad business decision is a bad business decision. Toyota invested hundreds of millions of dollars in a plant to build gas guzzling trucks just when the market was about to tank. Just because they also have other revenue sources does not make the decision a good one. In the 80s and 90s, Detroit was making money hand over fist on trucks and SUVs. Does that make the decision to slack on cars correct? No. By the same logic . . . Toyota is making money now selling Corollas and Priuses. Does that make the decision to open a huge expensive truck factory correct. No.
Also — in addition to it being a lovely self-loathing screed against American consumers — your opinion there seems based on questionable motives. Tell me . . . are the same sorry-assed American consumers refusing to buy any Detroit iron because they’ve been brainwashed by sites like this and can no longer make a decision not based on hype? When it serves you, you elevate the consumer i.e. the free market to the position of a god . . . “let the market vote!”; “make something the market wants to buy!”; “the market has spoken with their wallet!”. But in this case — when they do something that goes against your worldview — you slag the market, oh, excuse me, the American Consumer as being braindead.
The truth about hypocrisy.
In addition to much tighter credit from GMAC, Ford and Chrysler Financial you no longer have the subsidized leases based on lofty residual values.
No sane 3rd party lessor wants the depreciation exposure of V8 gas hogs for the inevitable next fuel price spike.
Finances permitting I might be looking at Honda’s “Prius Killer” in a few years.
@jimmy2x
Sorry – can’t agree with this:
Just have to say that I get awfully tired of hearing how the Japanese manufacturers were so much smarter than the US manufacturers in that they specialized in small cars.
etc.
The Japanese have been working foreign markets since the 50s, and have correctly assessed what comprised the majority demand.
GM in particular considered small cars a low-profit proposition, and shunned it. (If you could search the threads here, you’ll find lots of statements by Detroit-fans stating exactly that.)
I can “certify” the claim, as I had this explained to me in detail by GM honchos.
Small cars were a career dead-end at GM … it was where the losers were sent to expire.
OK – back to gas and whether SUVs are “coming back.”
Efficient, large capacity, good maneuverability 4x4s will now be reserved for where they are actually needed: rural, recreational, ex-urban driving.
They’re not needed in the city.
I just paid $1.99 a gallon to fill my tank and it felt so good…
I don’t think they are coming back any time soon (not soon enough for Detroit at least).
It baffles me that people are still arguing that the domestics weren’t short-sighted and brainless for focusing all their development dollars on big fat-bones SUVs. Doesn’t the current state of the market obviously, undeniably prove this? As soon as gas prices went up, as soon as people stopped leveraging themselves massively into depreciating assets (cars), the Big 3 flushed down the toilet because they didn’t have diverse product offerings.
What argument is there to make against this? That they were smart to give themselves over entirely to the tyranny of the market? That dedicating the vast majority of the resources of a multibillion dollar company to a venture that could easily dry up was a good idea? That the Japanese only sold efficient cars here because of their own market conditions and not because Americans buy them and at a profit to the producers? It’s all just a bunch of nonsense and the proof is in the pudding. Detroit focused all their efforts on huge inefficient cars, which people liked and bought, but as soon as things got a little tight, gas prices rose and the economy seized up, they were screwed.
The other side has no defensible point here, it’s odd to see people devoting time and energy to defending the position that US manufacturers were not short-sighted and that building an unsustainable, unprotected business model is wise.
Let’s give credit where credit is due; pch101 was correct that in the short term the oil would go down.
There was a report saying the the world demand has remained relatively stable over the last several months even the price was close to 150 USD. While the developed world lowered its consumption by up to 5% in response this was immediately offset by China which started increasing its strategic oil reserves (presumably while the oil is cheaper). Based on this one has to think that neither the high price recently nor the low price now is really based on market supply and demand.
However if and when the oil market stabilizes and returns to the market supply and demand pricing one would expect the price to be high and going higher since according to most sources even International Energy Agency now (they denied that the demand would outstrip supply until this year) demand will slowly outstrip supply going forward. Obviously if the world enters a depression as seems possible one would expect the opposite, plunge in the price of oil perhaps back to 10-20 USD range.
Hindsight is 20/20.
Put yourself back in history. Gas is cheap. The economy is booming. Bigger is better. Houses are getting bigger; horsepower is going up. The market is climbing.
Your company reigns supreme in the hottest items in the market . . . trucks and SUVs. You are acknowledged as having the best offering out there. You’re making thousands of dollars of profit on each one. The market is moving in your direction . . . more and more of it is moving into your segment of the product space. Your competitors are scrambling to catch up. Every one is looking to introduce competitive products, and to build capacity. Your worry is to defend or grow your share of the lucrative market.
Yes, there are small cars. But that’s where your structural cost disadvantage comes in . . . you know, the roughly $2K that you give up to pensions and healthcare for your workers. That means you don’t make much if any profit on these vehicles, where your competition does. But who cares? That market is shrinking. People are moving into trucks. The legislation is written in favor of this. As long as you sell enough small cars to meet CAFE, you’re golden.
Improve your main product. Protect your turf. Toyota’s building a huge full-size truck plant down south . . . better worry about that. Luxury versions are entering and taking off . . . and bringing even more profit. Develop that.
Are you telling me that if you were the CEO of this company, you’d have starved the moneymaking behemoth to feed the poor stepchild .. . because you were a ‘visionary’ and knew it would pay off? You would not have been the CEO for long, then.
And I warrant that if your bonuses were dependent on profitability, you wouldn’t have been so damn principled as you like to make out.
Admit the facts. Japanese makers were coming from a base and a home market built around small cars and high gas prices. They were doing everything in their power to expand their offerings in trucks and SUVs (I’d bet if you looked at their books they spent more on these vehicles than on the incremental improvements they admittedly continued to make on their cars). And Japanese makers have a structural advantage of a few thousand dollars per vehicle because they don’t worry about maintaining the financial and physical security of hundreds of thousands of employees and retirees, so they can make a profit where the domestics might not.
The domestic makers were coming from a base of large vehicles with large sales and large profits. They were tasked with playing catch-up in a segment that did not provide any profit. They had to deal with a legacy cost disadvantage.
Hindsight is 20/20. While the Titanic is sinking, it may be easy to ask why they didn’t see an iceberg the size of a mountain. But steaming through the fog, with a schedule to keep, the picture ahead is not so clear.
Paint yourself as a visionary if it makes you feel good. But I’d be willing to bet that you would do the same thing in the same circumstances. I have little respect for the armchair quarterback.
You know what I just realized?
Honda is the only auto manufacturer that is working on the development of humanoid robots!
The rest of them — domestics included — are shortsighted.
When the coming Plague of Leg Paralysis hits, and we can no longer walk to our cars or operate the pedals, then we shall all be forced to ride on the backs of our humanoid robot servants. I believe that is where the market is heading.
Any day now.
If I were CEO of Toyota, or GM, or Ford . . . I’d damn well start funneling my investment dollars into humanoid robot development. Who cares if I don’t make a profit there . . . now. I am a visionary. I believe in diversification.
All hail our (future) humanoid robot transportation overlords!
Anyone who cannot look forward and see this event that will surely happen in two five ten years is short sighted. Regardless of the timing . . . please check back with me six months after the event actually takes place. Then I will tell you what a visionary I am.
Stein X
GM in particular considered small cars a low-profit proposition, and shunned it. (If you could search the threads here, you’ll find lots of statements by Detroit-fans stating exactly that.)
I can “certify” the claim, as I had this explained to me in detail by GM honchos.
Small cars were a career dead-end at GM … it was where the losers were sent to expire.
You are correct in this – but please ask yourself how large was the demand for smaller cars (other than sports cars)when gas was relatively inexpensive? Not very much as I recall.
As dkulmacz has pointed out it is easy to be visionary after the fact.
it is easy to be visionary after the fact.
Yes, it is. But check this out:
Workers at General Motor’s Arlington, Texas, SUV assembly plant began working overtime this month and are scheduled to remain on overtime for the rest of the year.
The plant, which employs 2,500 workers, is now the only GM factory building full-size sport utility vehicles like the Chevrolet Tahoe, GMC Yukon and Cadillac Escalade.
Although sales of the vehicles are still down overall, they have rebounded in recent weeks as gas prices have fallen and cash-strapped automakers have slashed prices. The vehicles have proven to be a solid source of revenue for GM.
link
I guess time will tell if this is visionary.
The problem with dkumalcz’s visionary argument is this: GM purports to be a global automaker, selling into markets in which small cars are the big volume sellers. They claim that their international business (until recently) has been a thriving, profitable enterprise. Presumably this must mean that they have the capability of producing small cars at a profit for these markets.
So what is their excuse?
As to your question: I should hope not! The sooner the average American gets his fat ass into a SUV, the faster the prices rise for all of us again, and ultimately, to him , too. This makes it a no win situation. If American consumers remain enamored of smaller cars for a while, the Big Oil companies et. al. remain more confused about what price they can get away with, and this makes the price stay dowm for a longer while.
As an aside, own here (oh you Americans whine so much) the price of gas has not fallen an iota. This means we are paying roughly twice what Americans pay, and about 60% of what Europeans pay. When you calculate that against average purchasing power we are being just fucked!! That’s what you get when you socialize the market. Our beautiful Petrobras (just hammered by Moodys) has had a record profit. And why not? They have kept prices frozen at like 100 dollars a barrel for over 2 years. In that time imagine how liong the barrel has actually beem at that threshold? Yeahy like under 35% of the time. So, the Brazilian consumer is paying overprice 65% of the time, and now comes talk of a reduction in price. In 4 months time! Yeah, just enough time to guarantee (a morally undefensable) profit against our pocket book. Why 4 months? The summer driving season! Fuck consumers and after they get back to work in February, be benevolent and give them a break. But fuck the a little more. Heck anybody can pay an extra 200 dollars to the gov for revenue. After all they are rich and all driving to th beaches in their own private cars. Let the gov distribute the wealth (mainly amongst themselves).
Oh yeah, and you gotta protect the super millionaires who produce ethanol in this country. No I’m soory the patriotic businessmen who invest their “talents” (cough–lobby and cough cough–gifts) in a market with no competition.
Forgive the bile, but even without such virulence the truth is roughly really as I’ve written.
LOng live capitalism
ra_pro :
Let’s give credit where credit is due; pch101 was correct that in the short term the oil would go down.
While Pch101 is a generally a very astute commentator, I would like to point out that gas prices fall EVERY year in the fall, assuming there is not a major hurricane smashing refineries. Predicting the norm is not especially prescient, e.g. I predict it will be drought like in the Sahara next year.
The true test will come late next spring. However, thanks to a collapsing global economy and with it, lower demand, prices will rise but perhaps not as much as this year.
On the flip side, global oil depletion is as real as the depletion of the gasoline in your tank as you drive down the road. New wells must be found to replace old ones as they wither and die. This is not conspiracy theory, but petrochemical industry fact (ask a geologist or oil patch worker). New discoveries have paled in comparison to usage and depletion rates for decades now, and no new Saudia Arabia’s have been found. The IEA, whose job it is to monitor this, have pointed out that Mexico (our #3 supplier) will be an oil importer by 2014, just as the United States, Indonesia, the UK, and Norway before them have, and depletion rates for existing wells worldwide are now averaging 8-9%, while new discoveries are replacing 2-3% of total usage. Thus, peak oil is real, a simple compounding action.
Oil prices, per barrel are still 5x what they were 10 years ago. We’ll see $200/barrel before we see $20/barrel again, barring a complete economic collapse, and I’ll bet a year’s pay on it.
So the real question becomes…..can a crappy global economy continue to drive down demand faster than depletion rates drive down supply?
Film at 11.