Monday, July 03, 2006

US automaker sales down, largely because of fuel efficiency

One thing is certain about this current energy crisis and that is that it has been severe enough to start changing consumer habits. Although many people were simply griping about gas prices two summers ago, now they've actually started going out and buying cars that use less gas.

This has dramatically impacted US automakers because of their short-sighted strategy of focusing on trucks and SUVs and cars with large engines that are very inefficient. By contrast, foreign automakers who's mainstream product are cars that are more fuel-efficient are doing better.

U.S. sales fell for all three big American automakers in June, led by a 26 percent drop at General Motors Corp. , while Japan's Toyota Motor Corp. <7203.T> surged.

Ford's June sales dropped 7 percent and DaimlerChrysler's plunged 13 percent, underscoring the pressure on Detroit automakers at the start of a summer season they are counting on to clear an unsold inventory of 2006 models.

By contrast, Toyota -- now No. 3 in the U.S. market for cars and trucks -- posted a 14 percent sales gain. Toyota sold more cars in June than Ford and Chrysler combined.

Toyota's share of the total U.S. vehicle market rose to 15 percent in June, up from 12 percent a year earlier. The Detroit-based companies' market share sagged to 56 percent, down from 62 percent.

That article goes on to talk about the overall situation, explaining that Toyota is cruising on sales of its small cars like the Camry, Yaris, and even the Prius, proving that people are really interested in breaking away from gasoline.

As I said, and the article says, the weakness in American automakers sales comes primarily from declining sales of SUVs and now, even pickup trucks, although as the article explains, it's also because American's wallets are getting tighter for other reasons as well.

Sales figures showed sharp drops in sales overall for General Motors Co., Ford Motor Co. and the Chrysler Group as consumers turned towards more fuel-efficient smaller cars, a segment dominated by Asian imports.

Early reports also showed a general slow-down in vehicle prices as US consumers - who have been spending more than they earn for 12 straight months - respond to higher interest rates.

With gas prices hitting sales of Ford's best-selling vehicles, the automaker expects to see sharp year-on-year declines in July after sales fell seven percent in June, George Pipas, the US sales analysis manager said in a conference call.

"We'll experience double digit declines in July and the magnitude is the only thing to be determined," he said.

Most significant was the decline in pickup truck sales which - unlike full-sized sports utility vehicles which have been declining steadily for four years - have only recently been hit by gasoline prices, Pipas said.

Given that pickups are generally much cheaper (the local Ford dealership advertises an F-150 for $12,000) than SUVs, it has to be their lack of fuel economy that is the significant factor in this change.

I'm not economist, but it seems to me that this situatio isn't going to change very soon, and US automakers need to get used to it. Why they can't make a profit off of cars, I really don't know. But in any case, it appears that this gas situation isn't going to change very soon.

I'm not an economist and I haven't studied the reasons exactly why the 1979 oil crisis caused gas prices to spike, but in that case OPEC artificially shortened supply (that is, they had a choice whether to do so or not, as opposed to a natural shortfall of supply) and market fears conspired to push gas prices higher and higher. Although investor's fears are playing a role in the current situation, there is a real inelasticity in the market. Part of this inelasticity is being caused by the fact that not only is our demand much higher than it was in 1979, the demand of the rest of the world is as well. Also, production shortfalls and tightness in refining capacity are a big part of the equation. This article from CNN explains the situation.

As demand for crude oil has risen, several supply disruptions have caused bottlenecks. Rebel activity in Nigeria has cut out about a half-million barrels from the world's supply, and the war in Iraq -- where insurgents have targeted pipelines -- has reduced production there to below pre-war levels, Eagles said.

The nationalization of oil companies in Venezuela, increasing governmental control of the industry in Russia, and the continued wrangling with Iran over nuclear weapons also have led to concerns over future supplies.

The result has been weekly or even daily fluctuations in gasoline prices, as well as the overall rise in consumer prices across the board over the past several years.

Meanwhile, American production of crude oil also has gotten more expensive because the easiest places to drill have mostly gone dry, said Rob Schlichting, a spokesman for the California Energy Commission.

"It looks like we may be coming to the end of cheap oil. The really easy-to-pump product has been pretty much pulled out of the ground unless we have some new finds," he said. "More often, we're going to offshore areas like the Gulf of Mexico, which are more expensive to drill in."

Meanwhile, spare production capacity, or the ability to produce oil fairly immediately to respond to a sudden rise in demand, has been curtailed over the last 20 years because of the increased demand.

"In 2002, we estimate there were probably about 5.5 million barrels a day or so of spare crude oil production that was being used," EIA's MacIntyre said. "Now that's closer to 1 million barrels a day."

That's a good article and I recommend reading it in full. But this is a good summation:

Until either the global thirst for oil lessens or geopolitical events affecting oil supply are mitigated, the price for a barrel of oil will probably remain above $45, Lindemer said.

As a consequence, gasoline prices may not return to the $1 or $2 range common just a few years ago.

We need to get used to that.


Xanthippas said...

That's another interesting thing that Gore discussed in "An Inconvenient Truth." In following a completely short-sighted policy of selling the most popular cars, American automakers have largely ceded the future to foreign car-makers, and especially Japanese car makers. Sound familiar? You've got to wonder if there's something wrong with our system when the same thing can happen twice in a few decades, especially when car manufacturers were so thoroughly lambasted the first time around. Of course, the root of all evil is cheap gas. Without it, we wouldn't be talking about this.

Nat-Wu said...

Well, at least that root appears to be withering. But of course, like we've discussed in other posts, it's not so simple to divorce our economy from oil. It's going to take some real effort and probably a lot of people are going to be hurt economically. For example, if the auto industry shrank overall, that's tens of thousands of people out of jobs. Even if that many jobs were created in some new sector based on alternative energy or mass transit, they wouldn't all get those new jobs because there are so many job seekers out there.

And that's why I think the government should have started forcing a gradual transition on us long ago, instead of letting the process happen at its own pace.