The Oil Drum | DrumBeat: May 24, 2006

246 comments on DrumBeat: May 24, 2006

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fallout on May 24, 2006 - 9:29am

Troubled GM just can't seem to get a clue.
Their latest desperate attempt to get Americans to buy their massive obsolete gas guzzling clunkers:

GM incentive: A gas price cap
California, Florida buyers to pay $1.99
"General Motors Corp. is doing what politicians wish they could do: Lower the price of gas to $1.99 a gallon.

GM on Tuesday announced a promotion that caps gas at $1.99 a gallon for one year for buyers of certain full-size sport-utility vehicles and midsize cars in California and Florida."

http://www.chicagotribune.com/business/chi-0605240227may24,1,5572555.story?coll=chi-business-hed

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fallout on May 24, 2006 - 9:30am

When advertising fails, try outright bribery.

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rlaws on May 24, 2006 - 9:38am

Now you know why so many of us are pleased when oil prices climb: stupid companies with stupid business practicies like these become much less practical.

Thanks for raising the news though.

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john milton on May 24, 2006 - 9:48am

So, When the year is up and folks fuel bill jumps by say 50% (assuming that the pump price is at $3.5 / gal then) that would be at the same time that lots of them have to refinance their ARM on the McMansion and find that monthly payment steps up by 50% also. Maybe just to put a head on it they will be hitting personal "peak debt" at the same time due to credit card "max out", so they now have to pay for the "other stuff" like food for example, with cash rather than plastic... Lets add that cash outflow step function on top of the other 2. Sounds like a "perfect storm" to me.

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Todd on May 24, 2006 - 10:04am

Well, as long as we're going for the gusto, let's throw in the tanking US$ which will drive up the price of all those imported goodies they have to have.

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Darwinian on May 24, 2006 - 11:16am

The Dollar index, which is the dollar measured against a basket of all other major currencies, sits at .85 today. This is a drop of .04, from .89 where it sat at the beginning of 2006. However at the beginning of 2005 the index sat at just above .81. It goes up and down. There is no reason to believe that the dollar will not recover as it usually does.
http://futures.tradingcharts.com/chart/US/W

The ultimate cause, but not the proximate cause, of this oscillation is the inflation rate in the US as measured against the inflation rate of the other currencies. If our inflation rate is higher than theirs is, the dollar will drop, otherwise it will climb.

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BrianT on May 24, 2006 - 11:18am

In the short term. In the longer term, the fundamentals will win out.

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Darwinian on May 24, 2006 - 11:21am

Yes, the fundamentals will always win out in the long run. However the inflation rate in the US verses the inflation rate in the rest of the world ARE the fundamentals in this case.

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BrianT on May 24, 2006 - 11:30am

No. The fundamentals are the current account deficit (mainly) and the fiscal deficit. The published inflation rate in the USA doesn't have the credibility it once had.

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Oil CEO on May 25, 2006 - 1:59am

How are they measuring it? The credibility, I mean. And where do they publish it? Somewhere near the American League East box-scores, I hope.

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BrianT on May 25, 2006 - 7:34pm

Don't believe everything you read.

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tate423 on May 24, 2006 - 11:39am

Real inflation is approaching 10%. Our own Fed doesn't get it right, so why should I trust any inflation number coming out of any other country? Bottom line is countries are becoming more disinterested in our money, so the Fed is monetizing the debt. Any other countries doing this? I don't know, but if not I think it's safe to say we will have higher inflation than most any countries.

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Darwinian on May 24, 2006 - 11:49am

The published inflation rate does not matter. What matters, what moves the dollar verses other currencies is the REAL inflation rate. Currencies will always seek their own level in the world marketplace. When the dollar buys less in overseas markets, that means it is inflating faster than other currencies, therefore it will fall. If the dollar buys more it means the dollar is stronger, or rising if you will. Published reports count for nothing, real buying power, currency verses currency, determines the level of all currencies.

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tate423 on May 24, 2006 - 1:13pm

I completely agree. I'm pointing out that the published rates do not jive with the reality, that's all. So real PPP is determined on a micro level every day.

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Apuleius on May 24, 2006 - 11:25pm

Those fundamentals include all sorts of emerging problems around the world. China has a bad loan and corruption problem. The euro is causing all sorts of problems by making the European countries have roughly the same interest rates instead of letting them float. Not a problem in America because people in America move. But Europeans stay put even if their home country's economy is in the pits (relatively speaking) and so the euro has them kicked in the shins pretty bad. Then you have Chavez making every economy around him jittery.

So in other words, the dollar won't tank, but for reasons that don't leave much for hope.

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DIYer on May 25, 2006 - 8:08am

In the long term, you die.

Meanwhile the 'invisible hand' is gonna slap you silly.

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wstephens on May 24, 2006 - 11:42am

If the dollar index makes a little rounded bottom at 85 on your chart then the "chartist" could see this as a head-and-shoulders bottom (on the monthly chart). -- Shoulder early 2004, head late 2004 / early 2005, and shoulder mid-2006 (now). BTW, I am not a chartist.

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AlanfromBigEasy on May 24, 2006 - 10:12am

You forgot the increase in their utility bills.

Most thermostats do not go high enough to make cooling said McMansion affordable with higher NG prices for those that have NG fired utilities.

And heating ??

Oil, natural gas, electricity, propane.

Chose your poison if local wood is not a viable option.

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tate423 on May 24, 2006 - 10:23am

Time to pile on...

Think about the lowly folks in our society. Not the poor, but the working high schoolers. I worked in high school and I did so to have cash in my pocket and a car. That will come to a stop. Imagine when gas is $5 a gal and those high schoolers are getting paid 6-8 hour or something around that. If they are spending an inordinate amount of cash on gas, I think many start questioning if it's worth it.

The parents can drive them around, but what teenager wants that? I think many will be swallowing pride to keep a job. But it gets worse because the parents are also paying those prices and they are also making adjustments. So how long does mom & dad cart them around in their busy lives?

When I worked I was using those funds to pay for gas, insurance, & savings. I saved a ton of money, but more & more will be spent on gas. Discretionary income left over for these teens will be spent because they will try in vain to keep up with the Jones's around them.

Restaurants are seeing the first of cutbacks in consumer spending. People are eating out less which I surmise employs a large % of those high schoolers. So business is slowing, paychecks may be shrinking, & gas is increasing.

There are far more people in the bottom & middle (income), so I wonder how long everything ho hums along with no one stopping to complain.

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homebrew on May 24, 2006 - 7:41pm

Teenagers might have to OMG, RIDE THE BUS!!!

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R W Reactionairy on May 24, 2006 - 8:32pm

Or ride [gasp] two or maybe even four in a car ... or cut totally optional mileage by half ... or get a bicyle or that is too un groovy even a motorcyle ... or [well you get the picture.] The horror of it all!

BTW, it ain't just the kids. If Americans adults analyzed what they were doing in terms of driving and managed that mileage / fuel consumption downward through car pooling, reasonable use of public transport and combining trips, the reduction in usage would IMO be be a very big number.

BTW, that these behaviors have not become second nature is an indication that the pricing point at which pain is clearly evident has not been reached. Further evidence is the fact that U.S. pump prices are very low by European standards.

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Oil CEO on May 25, 2006 - 2:44am

Ride the Bus! Oh My Firkin God ! 95 cents!? I'll skate to the beach, and look better doing it.

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Oilrig medic on May 24, 2006 - 10:24am

Alan,

I saw your reply on the stale thread...I stand by my post. The entire chain of command was responsible for not doing enough but this does not remove personal accountability to new orleaners. All americans have a "It can't happen to me" attitude. When there is a disaster self rescue is the preferred method.

Chance favors the prepared mind.

matt

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fallout on May 24, 2006 - 10:40am

The Mormons (LDS) have a scripture I enjoy a great deal:
"If ye are prepared ye shall not fear."

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Oil CEO on May 25, 2006 - 3:43am

This is odd. At first I was going to joke, and then I read it again and got smart. Now I have a serious question. Or more. Are the Mormons Christians? If so, why are their scriptures different, and how are they different? Oh, now you've really pissed me off, I can't remember which book had that great piece on the midwest and Kansas, so now I have to go search the internet. Where the hell is Don Sailorman man you need him?

The other question is. Do you watch LOST? Did you see the season finale tonight? Episode should have been named "Prepared and Fear."

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DIYer on May 25, 2006 - 8:14am

Mormons are Christians. I am not a member of the LDS sect, but my understanding is that they believe Jesus came to America back when He was in the Middle East. I don't know if the visits were supposed to be sequential or synchronous.

They have this additional Bible text, written by their spiritual founder about 150 years ago.

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tate423 on May 25, 2006 - 8:47am

John Smith founded it who coincidentally was murdered here in Missouri. Following that Brigham Young took them to the Great Salt Lake Basin and settled. I know several Mormons. They interpret the Bible very different, very literal.

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Oil CEO on May 26, 2006 - 12:54am

As you all know, Mitt Romney, Republican governor of Massachusetts is most certainly running for President. Massachusetts produces both contenders and winners. He is a Mormon, so this issue will be coming to the forefront soon.

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fallout on May 25, 2006 - 10:06am

I'm not a Mormon, either, but have a few friends who are.
They are most certainly Christians (as the Amish are), but have some secondary beliefs that go along with traditional Christiandom.
One of their main tenants (of being prepared) is illustrated by the biblical story of Noah and his Ark.
"It wasn't raining when Noah built the ark."

I think you may enjoy this. Kind of useful, too:
http://www.theideadoor.com/RS/Noah_booklet.pdf

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Oil CEO on May 26, 2006 - 12:48am

I do. I like this a lot. I downloaded it and will be reading it more slowly soon. Thanks. Funny where we get led sometimes.

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fallout on May 26, 2006 - 10:41am

So true.

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The Interloafer on May 24, 2006 - 10:03am

That's very interesting, and I think it's a smart move from GM's perspective of trying to sell SUV's - although of course it's beyond stupid from the perspective of trying to stop global warming or wean ourselves off foreign oil.

This is a price manipulation that substitutes fixed costs for variable costs. People fixate on gas prices a lot more than any other cost of car ownership. So if GM jacks up the price of an SUV by X dollars but gives an X dollar break on gas, they'll think they're getting a deal. (It will also encourage them to drive more because, gas being cheaper, any individual trip will be less costly.)

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louGrinzo on May 24, 2006 - 10:25am

GM has ZERO chance of saving themselves from bankruptcy so long as they insist on trying to sell the kind of vehicles they want to sell instead of the kind of vehicles the market really wants. There's a lot of talk in the business press about the "corporate culture" of GM needing a major makeover, and I think this refusal by GM to adapt to the new reality of higher gasoline prices shows just how desperately they need a brain transplant.

The real problem is what happens when they file for bankruptcy--customers will likely flee from the dealerships, afraid to make that large an investment in a company whose existence they doubt. (I think GM is definitely headed for bankruptcy proceedings, but I have no doubt there will still be a company called GM in the long run. It will be much smaller, with a much stronger emphasis on more efficient vehicles, and it will be run by a completely different set of people, but it will still say "GM" on their letterhead.)

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kjmclark on May 24, 2006 - 11:35am

"GM has ZERO chance of saving themselves from bankruptcy so long as they insist on trying to sell the kind of vehicles they want to sell instead of the kind of vehicles the market really wants."

Of course, the problem is that they don't make enough money on the kind of vehicles the market really wants. They make money on large vehicles, but break even or lose money on small, fuel efficient vehicles. You could shorten your post considerably to just "GM has ZERO chance of saving themselves from bankruptcy."

They need more than a brain transplant. They need to shed their current contracts. That will only happen through bankruptcy. The problems from bankruptcy are only problems if you own GM stock or bonds, or live in an area with GM jobs. I live in an area with GM jobs, and I'm not looking forward to that. We've already started hearing the sarcastic "Thanks for buying American" diatribes.

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odograph on May 24, 2006 - 11:56am

GM is trapped between a rock and several hard places. For a while they did have a profitable small car brand (Saturn), but unfortunately managment (in their public statements) saw it more as a branding triumph than a small car triumph ... and so they made it more like the rest of GM.

It's hard for them to dig out now, but I think the opportunity was there (5-10 years ago) to create a "quality small car" badge, with good margins. This could have been done in parallel to broader GM SUV sales, and been there in reserve now.

Unfortunately, they have branded themselves too entirely as an SUV company. And even rebuilding Saturn as a Toyota/Honda competitor would be too little too late now.

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fallout on May 24, 2006 - 12:52pm

One of my favorite online automobile-centric websites is www.thetruthaboutcars.com. Although geared mostly towards the honest review of this and that model nature (think "Car and Driver" or "Road And Track"), they're very bluntly honest about much more than many of the mainstream print publications.

One of their reoccuring features is the "GM Deathwatch", which has been an ongoing series of articles (75 now!) for a few years now, covering what's wrong with GM.
Thought you might enjoy:
http://www.thetruthaboutcars.com/content/1148142465484771235/index.php

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odograph on May 24, 2006 - 1:42pm

Thanks, I've caught the deatwatch now and then, but not lateley.

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tate423 on May 24, 2006 - 2:12pm

Up until this retarded idea surfaced, I truly believed that GM would at minimum adopt some Japanese style management practices, but alas it's the same crap. They're done, stick a fork in em baby!

Ford is in no better shape. Reading through their capital spending they have not prepared at all for the ultra competition they are engaged in.

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geewiz on May 24, 2006 - 10:17pm

I ran across this article
http://www.automotiveaddicts.com/database.html
and the best picks (those co's that make them and sell them) are Toyota, Honda, Porche and BMW. There are a few exceptions like Morgan, Panoz, Bugatti, McLaren, VW and TVR etc. but by and large most everyone else is owned by someone. A real eye opener!

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