No. But at least some businesses are hurt less than others.
High oil prices tend to trigger a so-called “neighborhood effect” where selected manufacturing businesses that are located closer to their customers get a price advantage over competitors that are located far away. That is because local businesses have lower transportation costs than their out of town, or out of country, competitors.
It’s location, location, location that drives the relative cost of shipping certain types of goods. A supplier’s close location to his customers will result in low transportation costs.
Despite the quick run up in gasoline prices, the U.S. economy isn’t about to be eaten by the inflation monster.
While it is a good bet that sometime in the next few years the Fed will have to deal with rising inflation, now isn’t the time to change monetary policy in an effort to slay the inflation monster.
For the entire post, please follow this link to Seeking Alpha.
On Monday the Wall Street Journal ran an article that described the end of the golden era for oil refiners. It is a great article that, unfortunately, was published many years too late to be considered news. Just as gravity is a force that brings all objects to earth, public policy that destroys the demand for gasoline will hurt the refinery business. Not surprisingly, President Obama’s public policy initiatives that increase car and truck fuel efficiency have the side effect of hurting oil refinery and distribution businesses.
Just to be clear, I am not against the Administration’s effort to increase fuel efficiency in the vehicle fleet. Quite the contrary, it is a matter of national and economic security that we burn less imported fuel. Increasing transportation fuel efficiency is a “must” for the United States. However, I don’t think that it is realistic to believe that the energy industry is act like an old trusted dog that knows when it it time to walk into the woods and die. And, it isn’t fair to the refinery and distribution businesses to ask them to effectively subsidize the rest of the economy’s shift to more fuel efficient vehicles and alternate energy without compensation.
The Wall Street Journal reported that over the next few years there is going to be global overcapacity among oil refiners. Not only is demand being reduced for refined products (particularly in the U.S.), but there is a lot of new and efficient capacity that is coming on line in Asia and the Middle East. That isn’t a prescription for a lot of new investment in refinery capacity or for good returns for existing refiners.
I have a couple of news flashes about the future of oil refinery and distribution that I am pretty sure are big news scoops (at least for most major media outlets).
As gasoline demand drops refineries won’t be the only businesses whose investments are underperforming. There is going to be a lot of excess distribution and retailing capacity. So far the Wall Street Journal has only reported on excess refinery capacity. Distribution and retailing are the next segments of the industry that will experience overcapacity and the end of its “golden era” (to the extent that there ever was a golden era). That means that the U.S. will have too many tank farms, too many truckers that move refined products and too many gas stations that sell gasoline and diesel to consumers.
The oil refinery and distribution industry isn’t going to take an assault on their ability to earn profits sitting down. They are going to hold back on maintenance spending until U.S. refinery and distribution capacity declines and margins are restored. Restoring margins means that prices will rise. There will be a public backlash against the oil companies for earning too much money and maybe even worthless Congressional hearings where senior industry officials are publically flogged. If there are hearings, someone who claims to be smart, but really isn’t, will get on TV and announce that no new refineries have been built in the U.S. in more than 30 years and that this is another example of the U.S. losing its global economic leadership. Of course, no one will point out that official government policy on fuel efficiency has the nasty side effect of destroying the industry, that the policy is working and only an idiot would build a new oil refinery. Sound familiar? It reminds me of the summer of 2007 and the hysteria that took place in the media and Congress when refinery capacity was tight.
Overcapacity and falling margins reported by the Wall Street Journal on Monday were easily predictable. In fact, I know that they were predictable because in December, 2008, I predicted that oil refiners would face overcapacity and falling margins. Back in December I wrote two articles on energy policy which can be viewed here and here.
…while everyone agrees that cars need to get better gas mileage, virtually no one has thought about what happens to the people and companies that make and distribute gas for us to use. Better gas mileage has a side effect of hurting the refiners, transporters, wholesalers and retailers of gasoline. Better gas mileage destroys demand for gasoline and will create lower prices and over capacity. It isn’t surprising that vested interests in the oil industry are quiet but effective opponents of energy policy proposals. After all, how many industry leaders support federal initiatives that are the equivalent of economic suicide?
Of course, for every action there is an equal or greater reaction and the refinery and distribution story doesn’t end with demand destruction and stranded capacity and investment.
…Even worse, it will take years for the U.S. to achieve energy independence. We will need new investment to preserve existing infrastructure. For example, oil refineries need constant investment to operate. During the summer, with great fanfare, the media announced that it had been more than 30 years since the last new domestic oil refinery was built. Politicians acted like it was a national crime when the refinery industry was caught short of capacity. But, what rational investor would put money into a new oil refinery knowing that it is U.S. policy to reduce demand for their products and create overcapacity. And, for that matter, why should Saudi Arabia invest in production capacity to serve American demand if our stated goal is to leave their infrastructure stranded without its best customer.
The concerns of existing energy producers are legitimate and need to be addressed. If Obama’s energy policy forgets to take care of incumbent energy interests it will fail. Energy policy needs to make sure that investments in property, plant and equipment that are rendered obsolete or made uneconomic because of overcapacity are paid for through their useful economic lives.
The Administration means well but needs to get rid of its simplistic approach to energy policy which ignores how to transition the U.S. from a position of energy dependence to one of energy independence. If the Administration continues on its current policy path the industry will cut capacity until margins are restored. It will seem like the oil industry is holding the nation hostage to high prices while in fact they will just be acting logically and predictably. It is naïve to believe that Big Oil will merely stand by and watch hundreds of billions of dollars of investment that is needed to support the rest of the economy get flushed down the drain before the end of its economic life and without compensation. We need oil refiners, distributors and retailers to maintain the current infrastructure for the foreseeable future and willingly engineer a smooth transition to a different energy paradigm. If energy policy keeps on ignoring this inconvenient truth the shift will be very expensive and extremely rocky.
The problems of demand destruction, stranded investment and transition economics were taught to me in my Energy Economics 101 class 29 years ago. It is just too bad the Administration officials didn’t take the class.
The Chinese economic miracle appears to be unraveling at an alarming and accelerating pace.
In just 30 years, China was able to transform its economy from a Marxist basket case to a global manufacturing powerhouse. But recent reports of massive plant closings, skyrocketing unemployment, plunging exports and growing social unrest are raising serious questions about China’s economic and political future.
The problem is that China’s export growth engine was built on four Chinese economic pillars — three of which no longer exist and may never return.
The four Chinese economic pillars:
1. Really cheap labor. First and foremost, the Chinese economic miracle was based upon really cheap labor. Initially, the cheapest labor, slave and child labor, drove low export prices. Over time cheap migrant labor from the Western regions of China replaced slaves and children.
But even migrant labor has gone up in price. In the beginning of 2008 new laws raised labor costs through minimum wage and other worker oriented standards. So, while Chinese labor is cheap by Western standards, it is no longer the cheapest for high volume, low-valued-added jobs.
2. No environmental protection. China had few environmental standards and in some areas has made its water and air virtually unable to sustain human life. By polluting its environment, China was able to gain a cost advantage over other manufacturing countries.
But China slowly poisoned its citizens, and in 2008, new environmental standards were imposed upon manufacturers that increased costs.
3. Cheap and abundant financing. The main market for many Chinese-produced consumer goods is outside of China. It is expensive, though, to ship goods from Chinese factories to overseas customers, and factories require financing from banks to cover these costs. For a long time such financing was cheap.
However, the global credit crisis has dried up bank loans and Chinese manufacturers are now scrambling for liquidity. Until cheap and abundant financing returns, it is going to be hard to finance a high volume of Chinese exports.
4. Low oil prices and unlimited energy. China uses materially more energy per unit of gross domestic product than the United States, Western Europe or Japan. China burns approximately 10 times the amount of energy to produce $1 of G.D.P. than Japan and 3 to 4 times the amount of the United States.
Energy is used for production and transportation, and when oil topped $140 per barrel, the effect on China’s exports was to dramatically increase costs relative to other countries. While oil is once again cheap and plentiful, current price levels may not last forever. If oil prices rise again the Chinese export sector will become less competitive relative to more well-developed economies.
The elimination of three of four Chinese economic pillars has critically wounded the Chinese economy.
In just the toy sector up to 2.0 million jobs may have been lost in recent months. And, the employment carnage doesn’t stop with toys; published reports of job losses vary widely but seem to converge on up to 10 million total jobs having been lost in export related manufacturing industries such as toys, shoes, textiles, steel, electronics and construction materials. American job losses seem almost irrelevant in comparison to Chinese labor market destruction.
The risk is that extreme economic hardship leads to gut wrenching and violent political change.
Unrest is increasing in China, but it isn’t being fully reported because of censorship according to media sources. All the while, the Hong Kong Western community has been buzzing about rumored eyewitness accounts of troop and riot police deployments in Guangdong province. And, it is widely anticipated that as plants close this week in anticipation of the Chinese New Year which starts on Monday a lot of them won’t reopen and there will be worker unrest among the newly unemployed.
I was recently in China and found that many of the Chinese people I spoke with are scared and worried that China’s best days are behind it, and that the standard of living for hundreds of millions of Chinese is about to drop below the poverty line. They fear that mass-starvation will lead to violent uprisings, perhaps directed at the rich “capitalists” in the country. Images of luxury malls in Beijing, skyscrapers in Shanghai and conspicuous consumption throughout the coastal region don’t play well to starving peasants who are still waiting for their turn at the rice bowl.
Last week I published a blog article that discussed energy policy and suggested that an effective energy policy requires federally established minimum oil prices. Low and volatile oil prices destroy private investment in energy projects because returns become too uncertain to attract financing. As oil trades between $40 and $50 per barrel investment capacity for energy projects is disappearing. On Monday, the New York Times published a great article written by Jad Mouawad that articulates examples of supply destruction occurring from low and volatile oil prices.
If the U.S. wants to break its addiction to imported oil, setting and maintaining floor prices for oil, gas and coal must be a centerpiece of U.S. energy policy. Without minimum prices, “in the real world” investors won’t commit enough capital to domestic energy projects so that the U.S. can become energy independent. Domestic free market capital can’t compete with foreign government sponsored capital and energy policy needs to recognize this inconvenient truth.
Also, without minimum energy prices “green energy” will remain a mirage on the horizon, always there but always beyond our reach. Green energy is more expensive than government sponsored Middle Eastern oil and, without price supports, it won’t attract the necessary investment dollars to compete with cheap foreign oil. Green energy advocates fail to realize that government mandates aren’t the same thing as market solutions. Only minimum prices established through a variable surcharge will provide the market solutions that are needed to get green energy alternatives into the mainstream.
Below are some excerpts from Jad Mouawad’s New York Times article.
From the plains of North Dakota to the deep waters of Brazil, dozens of major oil and gas projects have been suspended or canceled in recent weeks as companies scramble to adjust to the collapse in energy markets…
…But the project delays are likely to reduce future energy supplies…
…The precipitous drop in oil prices since the summer, coming on the heels of a dizzying seven-year rise, was a reminder that the oil business, like those of most commodities, is cyclical. When demand drops and prices fall, companies curb their investments, leading to lower supplies. When demand recovers, prices rise again and companies start to invest in new production, starting another cycle…
…Investment in alternative energy sources like biofuels that had flourished in recent years could dry up if prices stay low for the next few years, analysts said. Banks have become reluctant lenders, especially to renewable energy projects that may prove unprofitable in an era of low oil and gas prices…
…According to research analysts at the brokerage firm Raymond James, domestic drilling could drop by 41 percent next year as companies scale back…
…“We expect operators to significantly cut their activity in the coming weeks due to the holiday season, and many of these rigs will not come back to work,” the report said.
President Elect Obama nominated his energy team yesterday and emphasized that energy policy is a national priority. Every President since Jimmy Carter has talked about U.S. energy independence, but no President has actually broken the U.S. addiction to imported oil. In the 1970s, I studied energy economics and policy and learned that mandates, slogans and “feel good” policies based on fads don’t work. Only economically and financially sound policies will break the U.S. addiction to imported oil.
A lot is riding on a successful energy policy. National and economic security, the automobile industry’s future, the cost and availability of food, the future of the environment and the nation’s economic recovery plan are all tied to energy policy.
Unfortunately, for as long as anyone can remember the United States has lacked an effective energy policy. Our country has never been more dependent on imported oil than now. Hopefully, $145 per barrel oil and our fear of running out of oil all together will move us to a consensus on energy that will actually work.
In the past year, a public consensus has formed around four principal energy policy goals. These goals are:
Minimum dependence on energy produced outside North America;
Low environmental impact from the generation of energy;
Reasonable cost; and
Preservation of the American “way of life” including strong national and economic security.
Current energy policy hasn’t achieved any of these goals and policy failures are becoming more and more dangerous for the United States. A successful energy policy must achieve each of the above objectives and be self sustaining. Initiatives that spend money on “green” energy, conservation and domestic production but which aren’t sustained by the private market when the subsidy goes away don’t work.
However, before “good” energy policy can be enacted, three unpopular inconvenient “truths” need to be recognized and dealt with. Disregarding any of these three energy truths will result in energy policy that won’t work.
Inconvenient Energy Policy Truth #1
There is no magic bullet that is going to make the U.S. energy independent. Successful energy policy requires a decentralized multi-strategy approach.
Large, simple solutions to the energy problem don’t work. Breaking the imported oil addition requires mass participation in decentralized energy production and conservation. Unfortunately, the American public has never embraced decentralized energy solutions. Virtually every major energy initiative generates opposition from groups that are dedicated to the status quo and are able to block or slow widespread adoption of energy solutions. Even windmills and passive solar panels are resisted by interest groups that frequently kill projects.
Renewable energy production and conservation is decentralized because renewable energy sources are incredibly spread out. Wind, tides and sunshine (some of the more promising renewable energy sources) aren’t concentrated in one place and require a lot of windmills, water turbines and solar panels to have a meaningful effect. And, conservation requires the commitment of every individual to succeed. Energy independence will only be achieved through the accumulated results of a lot of little things undertaken by many people at the same time.
Energy policy needs to rip down the local barriers, societal prejudices and zoning rules that prevent decentralized solutions. A “kitchen sink” approach to domestic energy production and conservation is needed because everything that can be done needs to happen at the same time. Environmental laws and other regulations need to be immediately modified so that interest groups that “don’t want that thing in my neighborhood” can’t mount irrelevant challenges to prevent renewable energy alternatives. While cheap imported oil was great while it lasted, until everyone decides to be part of the national energy solutions, the U.S. won’t be energy independent.
Inconvenient Energy Policy Truth #2
Energy policy needs to make everyone a winner. Policies that make losers out of existing energy suppliers, investors and workers will fail.
Historically, the policy debate has been insensitive to the people, investors and companies that manufacture, distribute and deliver energy. Virtually all energy initiatives have the unintended effect of leaving large investments to be written off because of obsolescence or lower demand. Policy makers don’t think about the vested interest groups that stand to lose from new and different fuels and conservation and, not surprisingly, existing energy producers have generated silent but deadly opposition to change.
As an example, while everyone agrees that cars need to get better gas mileage, virtually no one has thought about what happens to the people and companies that make and distribute gas for us to use. Better gas mileage has a side effect of hurting the refiners, transporters, wholesalers and retailers of gasoline. Better gas mileage destroys demand for gasoline and will create lower prices and over capacity. It isn’t surprising that vested interests in the oil industry are quiet but effective opponents of energy policy proposals. After all, how many industry leaders support federal initiatives that are the equivalent of economic suicide?
Similar issues exist for ports, ships and terminals that are used to import oil. Energy policy makers are naïve to assume that workers and investors haven’t noticed that government policy is going to kill their jobs and destroy their investment.
The issue of obsolete and underutilized resources is the same for owners of electrical power plants. Solar, wind, tidal and other renewable resources are a great idea unless you own or work in an existing power plant that isn’t going to produce power when the sun is out or the wind is blowing.
By the way, foreign oil producers aren’t too happy about losing U.S. business. This week’s edition of 60 Minutes featured the CEO of Saudi Aramco and the Saudi Oil Minister. They were clear that they want to keep the U.S. as their largest and best customer. Saudi Arabia isn’t going to give up without a fight and we can expect all sorts of trouble from foreign countries if the U.S. is successful in reducing its dependence on foreign oil.
Even worse, it will take years for the U.S. to achieve energy independence. We will need new investment to preserve existing infrastructure will be needed. For example, oil refineries need constant investment to operate. During the summer, with great fanfare, the media announced that it had been more than 30 years since the last new domestic oil refinery was built. Politicians acted like it was a national crime when the refinery industry was caught short of capacity. But, what rational investor would put money into a new oil refinery knowing that it is U.S. policy to reduce demand for their products and create overcapacity. And, for that matter, why should Saudi Arabia invest in production capacity to serve American demand if our stated goal is to leave their infrastructure stranded without its best customer.
The concerns of existing energy producers are legitimate and need to be addressed. If Obama’s energy policy forgets to take care of incumbent energy interests it will fail. Energy policy needs to make sure that investments in property, plant and equipment that are rendered obsolete or made uneconomic because of overcapacity are paid for through their useful economic lives.
Inconvenient Energy Policy Truth #3
Reducing America’s dependence on foreign oil causes imported oil prices to drop which makes the U.S. want to burn more cheap foreign oil. Energy policy needs to break this loop which undermines policy.
A successful energy policy will reduce oil consumption which will cause oil prices to fall. Cheap oil kills domestic energy production, renewable energy initiatives and conservation. It happened in the late 1980’s and 1990’s and, as prices drop below $40 per barrel today, history is repeating itself.
Low and volatile oil prices are bad for energy investments because investors can’t reasonably expect to make money on new energy investments. When investors fund energy projects, they create financial projections that assume different price levels for oil, gas and coal. If energy prices drop below a minimum level, the projections show that the investment won’t make money and the project isn’t funded. Highly volatile prices cause investors to create projections with wide price swings. There are very few new domestic energy investments that make money with oil prices at $40 per barrel. And, when investors create a price sensitivity analysis and assume that prices could potentially drop from current levels, virtually no projects make economic sense.
The boom and bust history of U.S. energy prices for the last 30 years reinforces dependence on foreign oil. Foreign producers have lower costs of exportation, development and production and can easily survive large price declines. Even worse, most large foreign oil production is government owned and traditional investment analysis isn’t used to decide upon production and investment.
Oil prices distort the automobile market. The current humiliation of the Big 3 executives because they didn’t invest in energy efficient vehicles ignores gasoline price history and the reality of consumer demand. Gas was cheap and U.S. consumers wanted big vehicles. Foreign manufacturers that appear smart because they produce energy efficient vehicles were forced to produce those vehicles because of energy taxes that drove up the price of gasoline to consumers in their domestic markets.
The U.S. needs government mandated minimum guaranteed prices for oil, natural gas and coal. Minimum guaranteed prices reduce price volatility and provide some measure of certainty to investors and consumers. And, it isn’t only renewable energy and conservation investments that need price certainty; new domestic oil and gas investment needs price floors to be competitive. With price floors, investors can confidently invest in domestic energy projects without being wiped out by low prices when foreign governments dumping energy into the market. Energy policy won’t work until prices are stabilized so self sustaining energy investments can take place and won’t be killed by foreign government price manipulation and production.
Current “cap and trade” legislation isn’t good energy policy and shouldn’t be relied upon to solve the problem of falling oil prices. Cap and trade legislation is supposed to reduce greenhouse emissions and isn’t energy policy. Cap and trade proposals are environmental policy initiatives and that isn’t the same as energy policy. Cap and trade does nothing to encourage domestic energy production and doesn’t address the issue of low and volatile prices.
A gas tax isn’t the same thing as a minimum oil price. While a gas tax will encourage consumers to drive more efficient vehicles, that doesn’t do anything for the supply side of energy. Only minimum oil prices achieve all of the objectives of tax policy.
Price floors can be enforced by imposing a tax surcharge on energy that is sold below the minimum price. Through tax surcharges, the effective price to intermediate and final users will be the minimum established price. And the revenue that is raised through minimum price surcharges can be used to compensate energy producers who are harmed by energy policy.
The U.S. has too much at stake for a pretend debate on energy policy that doesn’t recognize the three inconvenient energy truths. Failure to deal with reality has put the U.S. into the predicament of needing foreign and sometimes hostile interests to support us for our economic and national survival. This cycle of dependency must end. We need a new national consensus reached for energy independence.
Today Congress announced a great breakthrough that explains the cause of high oil prices. The cure for the energy crises is now known and simple legislation will cut gas prices, help the economy and raise living standards. MarketWatch’s headline said it all: “Gas could fall to $2 if Congress acts….Limiting speculation would push prices to fundamental level(s)…” But if only it were that easy to solve the problem of high energy prices.
As the debate on energy begins to resemble Lewis Carroll’s “Alice in Wonderland”, a surreal work of literally nonsense, it is time to wake up and realize that our national leaders shouldn’t go “down the rabbit hole” and imagine a solution to the energy crises. They should know reality is better than fiction when setting national policy and “oil speculators” don’t cause high oil prices.
Congress would have you believe that its scapegoats, the speculators, are a “new” type of “hulk investor” that has superhero powers to move mountains of cash into oil futures and thereby distort the fundamental supply/demand balance for oil.
Oil speculators are accused of pushing up the price of crude oil because they purchase oil futures and index funds that purchase oil futures. The oil “blame gamers” want to claim that owning oil futures is the same as hoarding crude oil inventories (which by the way is really the only way for speculators to affect the price of crude oil). But, purchasing oil futures is not the same as owning crude oil. The goal of an oil future purchaser is to resell for a profit their contract to someone who actually wants to own oil, i.e., has fundamental demand for oil, and will take delivery of the oil represented by the futures.
No one accuses oil speculators of actually purchasing oil or hoarding oil inventories, only that they purchase and sell oil futures. Since the trading of oil futures doesn’t affect supply or demand, it is hard to see how oil speculators push up the price that end users are willing to pay.
While it is easy for the blame gamers to focus on speculators as the boogeyman, they have a problem since there is no hard supporting evidence. Instead, the following facts destroy the case against speculators.
Oil speculators haven’t been hording oil; inventories are actually down. In order for oil speculators to affect oil prices they need to purchase oil, reduce available supply and refuse to sell their oil for a low price. In other words, they need to hoard oil, store oil and keep oil off of the market. If oil speculators were hoarding oil then oil inventories would be up and not down (as reported by the Energy Information Administration).
Instead, oil speculators are buying contracts to purchase oil in the future but then selling those contracts before taking delivery to “real buyers” who take delivery. Producers (supply) and end users (demand) drive price and if futures contracts become uncorrelated with fundamental prices speculators will lose money.
Futures contracts are trading at about the same value as spot market prices which reflect fundamental demand. Oil speculators don’t buy spot contracts and don’t affect spot prices. Hmmm…..this is a troubling fact for the blame gamers. Spot oil purchasers buy to fill fundamental demand and reflect current market prices. Because speculators don’t own terminal/receiving, storage and transportation facilities, they don’t purchase in the spot market. Since spot prices (the fundamental market) are very close to futures prices (the speculator market) that would suggest that if there is any speculative bubble in futures prices it is very small.
Oil speculators provide capital to the futures market which is a financial derivative market. More capital leads to narrower bid/ask spreads and less price volatility. The presence of more participants with greater capital in the market is resulting in lower spreads and less volatility for oil futures. The benefits of more capital is just as true for the oil futures market as it is for every other financial derivative market.
It is dangerous for the United States to continue to delude itself as to the real issues surrounding high energy prices.
When I hear our current Congressional and national leaders debate this issue I want to quote the Eaglet in Alice in Wonderland.
“Speak English! I don’t know the meaning of half those long words, and I don’t believe you do either!”
On Tuesday, June 3rd I was on FOX Business Network discussing the US auto manufacturers and why I think they are poised to regain market share in the North American car and light truck market. In particular, assuming GM makes it through the next couple of years (and the next couple of years will be very tough because of a weak economy and the stretched consumer) I think that GM has the potential to capitalize on several macro-economic trends to restore some of its market position. In particular, on FOX Business News the factors that I discussed include:
High Oil Prices – High oil prices raise the cost of transporting imported vehicles from Asia and Europe to the US. According to a recent CIBC study higher transportation costs for imported goods acts like a “tariff” on imported items and raise their cost. As a result, domestically-produced cars and light trucks are becoming more price-competitive relative to imported vehicles.
The Depressed US Dollar – The low value of the US Dollar tends to make imported goods (like cars) more expensive for American’s to purchase while not affecting the price of domestically produced goods. As a result, domestically-produced cars and light trucks are becoming more price-competitive relative to imported vehicles.
Inflation in Asia – Inflation in China is high (8%+ per annum). Inflation in Vietnam is even higher. Other countries in Asia that produce auto parts and raw materials for the Japanese and Korean automobile manufacturers are also experiencing high inflation. High Asian inflation makes imported goods from Asia more expensive for American’s to purchase without affecting the cost of domestically produced goods. As a result, domestically-produced cars and light trucks are becoming more price competitive relative to imported vehicles.
Domestic cost savings and productivity – The US automobile manufacturers have made enormous progress in improving productivity and labor costs. Moreover, GM in particular has more or less solved its pension and healthcare cost problems. A material disadvantage in labor production costs no longer exists between the US manufacturers and their Asian competitors. Today, the Wall Street Journal wrote an article on the productivity of US automobile manufacturers in which they assert that the playing field has been “leveled” between the US automobile manufacturers and their Asian rivals. As a result, domestically-produced cars and light trucks are becoming more price-competitive relative to imported vehicles.
Since the US automobile manufacturers have a lot of reasons to believe that they can compete on price with their Asian and European competitors, the question of GM, Ford and Chrysler regaining market share comes down to whether or not they are producing the type of vehicles that American’s want to drive. In the case of GM, their new vehicles seem to be high quality and selling well (within the context of a terrible market for car sales). The new Cadillac CTS and the new Chevrolet Malibu appear to be winners that combine quality, styling and value. Moreover, GM is beginning to use its technology to improve gas mileage on conventional vehicles and is introducing 8 hybrids in 2008 and 16 hybrids in the next 4 years. Moreover, the Chevy Volt is one of the most exciting new vehicles to be launched in decades. GM is turning “green” faster than any other automobile manufacturer and has the technology to follow through on its plans. Ford, on the other hand, has much more work to do to control costs than GM. However, Ford also has vehicles that are both good quality and getting closer to what consumers want to purchase. As an example, Ken Belson of the New York Times reported that the Ford Escape Hybrid is the new vehicle of choice for New York City cab drivers. In New York, all of the approximately 13,000 taxis will a have to average at least 30 miles to the gallon by 2012 and the only option for cab drivers to comply with the law is to purchase hybrids. And, the Ford Escape is the hybrid of choice with a market share of 83% of the New York City hybrid cab fleet. The performance of the Ford Escape Hybrid has been very good despite the grueling pace of New York City taxi cabs. As I said on FOX Business News, I think I am in a minority in thinking that if the US auto manufacturers make it through the current down sales cycle without going bankrupt, the future looks pretty bright for them.
Below are two video clips from FOX Business Network where the automobile manufacturers were discussed
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