Does GM Bankruptcy Mark Peak US Oil Demand?

Yesterday, as expected, General Motors entered a structured bankruptcy designed to create a smaller, more profitable car manufacturer.  The bankruptcy was orchestrated by the Obama administration's auto panel and was designed to "save" as many auto worker jobs as possible.  We are now witnessing the rapid restructuring of the American automobile industry in a world of reduced new auto sales.  The challenges for auto sales are both government regulations and credit availability - both of which remain is a state of chaos.

President Obama went before the American public mid-day on Monday to describe the auto industry developements and in an attempt to educate people about the implications of the bankruptcy moves.  We were struck by his bold statements about the future, some of which he alread had baked into the equation but without announcing them to the public.  One statement was that GM's share of cars sold in the US in the future would rise.  That is likely true since one of the restricitions as a condition of the sale of GM's European Opel brand is that it cannot be sold in the US.  Secondly, as part of the deal to win autoworker support, he agreed to scale back management's plans to build more fuel-efficient, small cars in China that would be imported into the US.  Instead, GM will be required to retool a closed manufacturing plant to make these small cars.  So by restricting competition from an established small car manufacturer, cutting off importation of GM small cars made in China and forcing a shift in that production (by someone who doesn't want to run an auto company) to the US, Pres. Obama is gaming the system.  But why didn't he explain all this?  It's much easier to clear the high-bar if you have a step stool out of sight.

Average pump prices for unleaded regular gasoline hit $2.49 a gallon according to the May 31 Lundberg Survey.  This is the price level at which American driving habits begin to be impacted.  Everyone talks about the fact that despite gasoline pump prices rising, they remain well below last year's level.  True.  Last year the average unleaded regular gasoline cost drivers $4.11 per gallon.  But as the chart below shows, when gasoline pump prices first crossed the $2.50 barrier, vehicle miles driven stagnated.  With pump prices over $3.00 a gallon, 12-month cumulative vehicle miles driven began to fall.  Miles driven are continuing to fall despite gasoline prices having fallen into the $1.60 a gallon range.  The recent gasoline price fall has to be associated with the economic recession, but one cannot ignore the fact that shifts in long-term trends occur as a result of forces that cause people to try something different.  Have Americans decided that their love-affair with the automobile has come to an end?  Time will tell, but to fail to consider this potential when thinking about future petroleum consumption in the US would be a mistake.

These are extraordinary times.  As this blog is written, CNBC's Squawk Box is interviewing the head of Zipcar, the automobile sharing company where members can use cars by the hour.  More importantly, the Obama administration's new rules on increased vehicle fuel-efficiency and emission restrictions will add significantly to the cost of new cars in the future - estimates of up to $1,300 per car.  German studies have suggested the cost could be $1,500 per vehicle and if the ultimate emission restrictions the government is thinking about are put in place, the cost could to rise to $5,000 per vehicle.  This is before we deal with the new profitability metrics for the auto industry.  If we are going to have to live with small cars, their sticker prices will need to rise by somewhere between $8,000 and $10,000 per car. That means small cars currently priced in the $15,000 - $18,000 will likely cost $23,000 - $26,000 - do you think that will cut down the size of the new car sales market?

Auto sales are currently running at a sub-10 million annual rate.  Even with the downsizing of GM and the restructuring of Chrysler, it is hard to image that the domestic auto industry can be profitable at this level of cars.  Optimists are expecting sales to rise as we are getting rid of older cars at a faster rate than new vehicle sales.  The average age of the fleet is still only barely over nine years - and given the improved life of vehicles and engines there is no reason why we can't have an auto population average age of more than 10 years.  That is bad news for near-term auto sales.

We have two thoughts about all this:  I would be looking to buy asphalt as we will be paving parking places for all the small cars that will be manufactured that the public won't be interested in buying.  So how will Pres. Obama force people to buy these cars?  Instead of federal tax refunds, get ready for your discount car purchase coupons!