Saturday, December 3, 2005

Failing car companies means the car companies failed

What's good for General Motors is good for America, eh? At least that's what they used to say. But is it? This is an especially poingant question right now as the car companies are seeing slowdowns in their sales.

Another Crummy Month for American Cars (By Seth Jayson (TMF Bent), fool.com, December 2, 2005)

He points out the 3 major car companies are all seeing drastically declining sales. And at the same time Toyota was seeing a jump in sales.

According to Seth the pundit class is clamoring for the government to do something about this. In other words some sort of handout from the government to prop up the car companies.

In my view that's the last thing the car companies need. If the car companies are seeing a decline in sales, well I can point to something Seth did not. Namely, the price of oil coupled with the dependance by the car companies on SUV sales.

The price of gasoline went over $3/gallon over most of the U.S. for a period, however it's since fallen again to where it was before the jump (in California it's around $2.40/gallon). This sent shockwaves around the country, people looking to dump their SUV's, and looking to get transportation that doesn't use so much gasoline. This of course would cause a shift away from SUV's.

Seth talks about a price war fooling the public into thinking the price of cars would always be dropping. I don't know about that. What I do know is the people I interact with got alarmed over the price of gasoline.

I wish to repeat something ... long term, the price of gasoline is only going up.

The recent price hike had to do with scares over the war in Iraq and damage done by the hurricanes this summer. However at the same time the oil production system is running at full capacity, AND at the same time demand is only going up. Oil demand doesn't come just from the U.S. but both China and India are seeing a surge of their middle class, and a shift from owning two-wheelers (bicycles and motorcycles) to owning cars. As China and India do this their demand levels will go up.

Further there is the Peak Oil scenario to consider. The idea is that at some point discoveries of oil reserves will not be able to keep up with the demand. At that point there will be a peak in oil production capacity, and assuming demand continues to rise oil availability will only fall. Market forces will make sure the price goes up, and up, and up.

Now, let's get back to the major car companies. They've been riding high on a binge of SUV's for years. In a way they were just responding to customer demand, but at the same time those car companies could have done as Toyota did and looked into the future to see the oil picture. The public obviously doesn't understand the oil picture, or they wouldn't be buying gas guzzling SUV's. But the car companies have a lot of smart people in them, obviously the car companies are capable of seeing the real oil picture.

The real oil picture is that the long term trend for the price of oil is upward. And that any time the price of oil gets "high" the public panics and switches to small cars.

The car companies don't deserve any handouts ... they don't deserve sympathy ... nor pity ... they need to take their lumps and change their business. Toyota and Honda have both been pursuing the high efficiency concept for years, and they're doing wonderfully.