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19 December 2008

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You have an escalade? Sweet ride!

Stormcrow

Of course, the unanswered question is how long the price will continue at these levels.

I think the present falloff is consequent to the collapse of a bubble market in oil futures. IMHO, this was pumped by the daylight madness of the Bush administration's policies. Particularly with regards to Iran. Now that the Bush administration is on it's way out, people are calming down.

This will not have any effect on the long-term availability of oil, since it is a mined resource. Much like high-grade copper ore once was. When it's gone, it's gone.

Hence, I expect that over time scales longer than that of a year or two, we will probably see the price per barrel slowly climb back up.

I don't want to make the same mistake I have seen so many other people make. And it is one that you yourself have called out here, by implication. I don't want to assume that there is only one root cause driver for oil prices.

As for autos, since I am not one of the nomenklatura, I'll stick with my Toyota.

While it's true that in general, Japanese automakers don't produce all that much better a product than American ones do, Toyota continues to be the exception. They've been quite consistent about this, across their entire product line for the last quarter century and counting, if Consumer Reports Frequency of Repair data is to be trusted.

Besides, considering that we're picking up the pieces from the last several misadventures of America's Masters of the Universe, I'm not sure I'd want to emulate them. In my world, failure of that magnitude has consequences.

zanzibar

Yes Pat. El Presidente fed GM & Cerberus Chrysler a TARPetizer.

Chief Obama will then feed them the main course and maybe to keep the "lefties" at bay they will be fed dessert too to make a few "green" Escalades. You know, must keep the hungry automan just like the bankerman well fed.

And then there's the $850 billion plus sizzle that will be awaiting the Chief's arrival. I wonder if there is a betting pool somewhere for who the incoming Adminstration's Halliburton and Blackwater will be? Anyone know of Chicago based asphalt companies who will be re-laying for all those new Escalades having smooth rides.

What's not to like. We are all ZIRPer!

kevin

"Does "peak oil" have any effective meaning?"

Wait till the rate cuts result in inflationary pressures. Don't speak to soon.

b

"People also say that the Big Three should not have made full sized cars, pick-up trucks, or SUVs. Well, capitalism implies obedience to market forces. Most Americans like big vehicles. The Big Three responded to that preference. "


When one looks behind that "consumer preference" one finds that this preference was set by a tax loophole the big three had lobbied for.

/quote/
A 1997 provision in the U.S. tax code (Section 179) provided small businesses with a tax write-off of up to $25,000 for a vehicle weighing more than 6,000 pounds- used 50% of the time for work purposes. The original intent behind this provision was to encourage investments in pickup trucks, minivans, and other needed service vehicles. A far smaller incentive was provided for cars—less than $7,000 over two years.
...
n 2003, the Bush administration proposed increasing the tax deduction to $75,000. Lawmakers responded by expanding it to a whopping $100,000 as part of the $350 million tax cut package.
/endquote/
link

So I blame the big three and blame Congress for setting such a stupid tax preference.

The Escalade may be a fine car and with a consultancy you are eligible for the effective tax cut on it.

But this is not inherent consumer preference nor market forces, but a tax preference set by policies.

Revert the tax preference, high depreciation ability for small cars and low depreciation rate for big cars, and consumer preference and market forces will be for small cars.

As a national policy it is crazy to prefer such gas guzzlers as they increase the "necessity" to keep up standing forces in the middle east and elsewhere.

greginak

nobody wants a command economy telling people they can only buy or sell small cars. The big three were all to willing to sell big cars and let euro and japanese car makers have the market for smaller, efficient cars. That was short term thinking that left them unprepared. now I think people will soon forget how expensive gas was and go back to Tahoe's to get them to the mall. if gas never gets expensive again they will be fine and money spent of developing and building efficient cars will be a waste.

At some point I imagine/dream/believe/pretend Americans will engage is some amount of long term thinking.

josephdietrich

I think the general idea within peak oil theory is that you'll have a general upward trend in price over time due to the increasing costs of extraction, until eventually you have a situation where it costs more to extract the fuel than the fuel itself is worth in terms of energy. As peak oilers say, we will never run out of oil, it will just become prohibitively expensive to draw it up out of the ground.

Further, peak oil theory suggests that there is an optimal production capacity for any particular field; basically, if you produce more oil at any one time than this optimum, you run out the field and don't get as much out of it over its lifetime. This can be scaled up to a macro level (i.e., all the fields in a country, or in the world). The idea is that we are near or at this optimum output capacity.

Over the last several years, demand has been pretty close to or exceeded production, and that has lead to a trend of increased prices. Several analysts have suggested that this should lead to a period of wild ups and downs in the oil futures markets due to exaggerated feedback as they try to cope with the situation, and what we are facing is an exaggerated down in this cycle after an exaggerated up.

Since I'm a layman, I don't know if any of this is true or not. I suppose we'll see.

Michael Singer

Dear Pat,
When Obama began his run you dismissed him. But then you changed your mind as did many who began to understand he might be a good pol and an articulate leader. One of the things leadership may mean is going against not the American people's desires but explaining what those manipulated desires have to do with unintended consequences. Do you you really believe American car buyers want big cars, especially when gas is cheap? Do you think what they want is manipulated brilliantly by the craft of ad men and women and their constant barrage of adverts on TV which show viewers how beautiful and tough all these big cars and gas guzzling trucks are? Do you think a leader might educate Americans that big cars aren't necessarily good for them or their children or the future of the planet? Maybe someone like Obama cn make those cogent arguments to Americans. That wold be real leadership. Bush refused to admit global arming existed for 7 years. And he never publically made the connection between an oil based economy and global warming. Do you think his program to tackle global warming is going to happen with Americans driving Hummers and the like? How would that work exactly? He may actually lead, he may actually convince Americans that like smoking, some things we like may not be good for us. That doesn't mean we have to go to a command economy, It means that it's an illusion that consumers determine the market. It's not so, never has been. It's the argument that the Big Three have made for years and now look at them. And a good leader like Obama maybe will have to fight the advertisers and their demand creating product: adverts, rather than some leftists boogyman who wants to force Priuses on Americans.
Michael Singer

J

Colonel,

Does the LOW gas prices mean that we can now stock up on our own M1Abrams? Now 'who' would have such a yard sale. Hmmm.. Could you imagine cruising at 30mph down main street in your very own M1Abrams.

Cieran

Colonel:

You know firsthand my brand of SUV, so we both have sweet rides (to steal a great phrase from Andy). And we've agreed on the non-factor of peak oil in the current run of price oscillation -- here's my money quote from SST on August 26th:

Anyone who believes that Peak Oil (the aggregate reservoir production physical response, not the mass hysteria induced by the term) is the reason for the recent wild swings in crude oil prices ought to "show their work", because the math just doesn't add up.

But I'll part company with you on the near-term consumer interest in gas guzzlers, because I think it'll be a long while before we see revivals of Hummer-esque purchasing patterns.

The biggest obstacle to resurrecting car purchases of any kind is a lack of available credit, and since big SUV's are more expensive than smaller more fuel-efficient models, the credit required for SUV sales will be harder to come by. And the fact that they have low resale values (caused in large part by a supply glut) won't help one bit.

Repeal of the insane tax loophole that b illuminated earlier on this thread will put another nail in the coffin of oversized cars. Why the GOP felt it appropriate to meddle on the demand side of the car market is beyond my ken, especially since those same politicians are now castigating U.S. car makers for doing what the tax code suggested they should.

sherry

Gas wil never be down to a dollar a gallon. If all gasoline cars, trucks, and suv’s instead had plug-in electric drivetrains, the amount of electricity needed to replace gasoline is about equal to the estimated wind energy potential of the state of North Dakota. Of all the bailout bucks we have spent nothing would go further to help our country than to bail us out of our dependence on foreign oil. This past year the high cost of gas seriously damaged our economy and society. While we are doing the happy dance at the pumps OPEC is cutting production to raise prices again. I highly recommend Jeff Wilson's new book The Manhattan Project of 2009 Energy Independence Now www.themanhattanprojectof2009.com as well as Better Place's web site http://www.betterplace.com/ to anyone who is worried about our economy and interested in seeing us become more energy independent .


Patrick Lang

Michael

You don't know enough people from "flyover" country to really have an opinion on this. How about a side bet for lunch in New York? How's the book?

Cieran

As a bonafide connoisseur of "lamb fries," you ARE qualified to have an opinion, but I still think you underestimate the male American drive for "bigness."

b

As I wrote to you earlier, you exactly explained the process by which the Ft. Worth manufactured Escalade became attainable by such as me. It IS a a lovely ride and my wife likes the heated seats. pl

Cieran

Colonel:

As a bonafide connoisseur of "lamb fries," you ARE qualified to have an opinion, but I still think you underestimate the male American drive for "bigness.".

And here I thought my taste for experimentation in dinner appetizers would rate some level of discretion from a spymaster like you! Oh well...

But on the "bigness" topic, I think I do appreciate that American automotive desire.

Truth be told, every automobile I've ever owned has been an SUV or a 4WD pickup, starting back in the mid-70's when those kind of contraptions were hard to find. Thus I've watched America's recent dubious flirtation with big off-road vehicles from the vantage point of being an early adopter of that technology, and the view has been quite interesting.

My first brand-new 4WD vehicle was my beloved 1983 Toyota pickup, which lasted for 250K miles before I sold it in mint condition to one very happy buyer. When I bought that truck, nobody wanted such vehicles (my local dealer was stuck with dozens of them, as part of their allotment of a variety of Toyota models, and they were practically giving them away).

It's only been in the relatively recent past that big SUV's have become de riguer in most of America (consider the rise and fall of the Hummer marquee, whose entire mass market history within GM spanned only one decade). SUV's have always been popular in niche locales where I've lived (e.g., near the Sierra Nevada) and in places where status must be displayed (metropolitan Washington DC has always seemed to me to have as many SUV's per capita as Lake Tahoe!), but their use as larger versions of the stereotypical family station wagon is a relatively recent development.

And that development is one that has been fueled by cheap oil and even cheaper credit.

The former cheap commodity may be returning (tho I'm not yet convinced of that, especially since the current price of sweet light crude may wipe out investments in new refining capacity for heavier varieties, thus setting the stage for another ugly price swing).

The latter commodity is definitely not returning, at least not in the form we've gotten used to. A large fraction of recent SUV sales arose from mortgage-equity-withdrawals, and with that odd form of ATM now closed, that component of SUV demand is gone for good.

So there will be ample supply of used SUV's of recent vintage (I see them parked with "For Sale" signs hung on them, all over the place in these parts of late), but I'm not convinced that demand will soon catch up with supply.

Supply and demand of lamb fries is still good in these parts, though...

Andy

Michael,

The Ford F-150 was the best-selling vehicle for 17 straight years until this summer. People know what they want in a vehicle. "Leadership" in the form of a pol "educating" the public isn't going to have much effect. It's likely to have the opposite effect, if anything.

I just ran across an interesting article in the Atlantic which I think does a good job of explaining Detroit's problems:

Detroit should have reacted, I'm sure, by making smaller cars. But smaller cars were harder to make for Detroit. Buyers thought of them as a non-premium product, which meant they wouldn't pay for the lucrative options packages. And because they used fewer materials, the labor component became a relatively larger part of their cost. Labor was where Detroit was least competitive. According to the automotive analysts I've seen, Detroit still loses money on small cars like the Ford Focus, which are sold at a loss to help make Corporate Average Fuel Efficiency numbers come out.

and

But perhaps more importantly, Detroit turned from making money on cars to making money on financing. Detroit didn't make a big profit by selling you a Ford Taurus. It made money on financing your Ford Taurus; often, the car was sold at a loss in order to get the finance business. The Big Three were banks manufacturing cars as a loss leader.

Read the whole thing. Although I think "b" has a point with tax incentives, there is much more to it than that.

J

Pat,

i toast you and hope you enjoy your Escalade. as for me my 'Cadillac' is the 4 hoofed variety. i just saddle up/harness up and go. riding in the saddle through the pastures with a 5f 30mpg gusting N wind chill, makes one appreciate that hot cup o java waiting back at the homestead. guess you could say that's my personal heated saddle seat so to speak.

rcthweatt

As a former oil field worker(late'70s to early'90s), I'm convinced joesphdietrich is correct; we may not be running out of oil per se, but we are running out of very large, easily(thus cheaply) developed oil fields. This is not in dispute. This implies that going forward ever higher levels of investment will be required to replace the old, declining fields which, in turn, implies that the price of oil will trend upward over time.

This is serious enough; but there is a further issue- our free market economy is seemingly incapable of financing the investments required in a timely way. Wild swings in oil prices, like the one we're experiencing, lead to wild swings in investment in oil exploration and development. It's now tanking, just like it did in the 1980s. This is not just a matter of the necessary development not getting done, it's also a matter of the necessary new capacity not being built, and existing capacity being destroyed- not only are oil rigs idled, but the new ones that will be needed are not built, and the yards that build them go bankrupt. Been there, seen that. When the new prospects, particularly offshore, are ever more technically demanding, this pattern, a recurring, in fact endemic, one in the oil business, has serious implications. Without a stable, sufficiently high price, the necessary development will not get done, and serious shortages,perhaps within a decade, are inevitable. Trouble is, high oil prices tend to cause recessions, falling demand, and then falling oil prices. Does anyone expect OPEC's cutbacks to work? They haven't in the past; clearly the oil markets are currently unimpressed. Direct, planned intervention in the oil markets by all the stakeholders, including OPEC, would be required to address this. How likely is that?

We're coming to the end of the oil age; it's just not going to work anymore. I suspect most Americans realize this, at the back of their minds at least; the current market is luring us onto the rocks. A thought experiment- would it be easier politically to tax oil and rebate the proceeds by cutting pay roll taxes, or to stockpile immense quantities of oil to keep the price up? We need to do one or the other.

marcus

Oil production peaked in the US in 1970 (http://www.theoildrum.com/files/US%2048%20States.png)

World-wide oil production plateaued in 2005 even though the price of oil increased during the same period. (http://www.theoildrum.com files/plateau_ogj_cc_aug07.png)

Oil demand was growing at about a 4% clip before the latest economic contraction (http://www.eia.doe.gov/steo)

Could world production following the same curve as US production? Might it be wise to plan for a tightening oil supply in the future?

The market should rule. If an individual wants to use 3 times the gas than average he should be allowed as long as the true cost of procuring that gas is reflected in the price. As long as the Kingdom keeps accepting our fiat "treasure"--no problem --its the hand holding costs that are harder to calculate (http://www.csmonitor.com/2005/0426/dailyUpdate.html)

Charles I

UMMMMMMm heated seats. I'm 52 now ,frothing luddite used to be against electric windows, seats and the rest(I'm too cheap, too many moving parts to break) but I use it all now as I speed to the cottage in 6 cylinder fully loaded Accord. I hate crusie control for the most part, cause I wanna DRIVE.

We're human. We've been ground down to a diminishing attention span by nature, the exigencies of this life, with some clever manipulation(the readily discernible techniques of which come from those soft social sciences you seem dubious of Pat).

Still Peak Oil tends to support the price in the end, and so what if we have a ten year global depression. Eventually, HUNDREDS AND HUNDREDS MILLIONS more in Asia and India are going to be using all sorts of electrical toys and driving, even if thy're all in Tata's. Even the poor here live large energy-wise. Wars, economic disruption, Catastrophic industrial accidents,competetion, whatever, will, remain constants as population and resource use goes up. Sweet Crude will be the most fought for fungible energy source, miles ahead of all comers until my dick Tracy nuclear powered wrist watch, which will charge up all my other doodads, including my then government-mandated North American built Lada Electrico, comes online. Don't hold your breath.

Hopefully we won't still be fighting the GWOT, pedal to the metal, but just buying the damn stuff. I'd give it all up yet pay top dollar to drive to the cottage.

Cold War Zoomie

Mine's bigger than everyone's around here!

Sissies!

Lamb fries are for babies! Real men eat Rocky Mountain Oysters.

Fred

“Will most Americans want little cars when gasoline is at prices of that sort? I doubt it.” Now that had to be the easiest analysis anyone has ever done. I remember the oil embargo period, it helped usher in Ronald “Government is not the answer to our problems, government is the problem.” Reagan. I believe he undid most of the energy initiatives of the Carter administration. There are some great suggestions here, but I’ve got a few questions:

Sherry, where are you going to build all those transmission lines from North Dakota to the rest of the USA? Since they will cross state lines they’ll be subject to federal regulation. We know what a good job Bush did with that, or have you forgotten how Ken Lay and Enron made did such a wonderful job in the ‘free market’ of California in 2000?
(In Michigan the most potential for wind power is 4-11 miles offshore in Lake Michigan, there are no transmission lines for them nor could they be built quickly. The total expected power from wind energy is about 7% of the state’s need for electricity – before adding any significant electric vehicle use to the load. And you will still need base load capacity for periods when the wind isn’t sufficient.)

Andy, Ford makes a profit on each Focus sold. As for why Detroit sold big cars, the profit margin is greater, and the greatest pressure was from Wall Street to increase profits.

Moody’s Chief Economist Mark Zandi spoke a great deal about how much money the auto industry needed in the next few years. Just what were Moody’s ratings of the industry in the past few years; and while you think about that think about how accurate the ratings industries’ ‘analysis’ of the financial industry were these past few years. Glad he’s helping close the vault door now that Wall Street has $700 billion, no strings attached. At least I can still drive my Crown Victoria (160,000 miles and still get 25mpg on the highway); the only thing that will outlast that is the debt we are stuck paying for all the Wall Street Welfare. Still no plan from Citibank, AIG or any other firm; are they taking some pay cuts and selling the corporate aircraft?

kao-hsien-chih

One thing people who love electrics forget: where does electricity come from? Where I'm originally from (CA), electricity is both rather expensive and clean (natural gas). For most of United States, it is both rather cheap and very dirty (coal). (I have no clue where I'm curerntly getting electricity from--AZ) It will take an enormous and very costly retrofitting of power generation capacity before electricity is actually "clean." Burning gasoline is a lot cleaner than electricity for vast majority of Americans.

Cieran

The key limitation on converting automobiles to electricity is that storage technologies for electrical energy are still awful (expensive, environmentally destructive, not scalable, etc.). So electrical cars remain at best a niche market until storage technology is developed.

I believe that solving this thorny technological problem will be a high priority for Steven Chu, the new Sec. of DOE. He's exactly the right person for the job, and he's demonstrated at LBL that he knows how important this type of technology is to the U.S. economy.

The problem is very difficult, but it appears solvable within the framework of existing science, and the U.S. is exactly the right place to solve it (we have plenty of expertise in all the right technical areas). Its solution has the potential to completely disrupt the oil industry, so it's not something that would get serious attention under the Bush administration.

A scalable solution would also open the door to broad use of renewable energy, so progress on this front could become one of the most important technological achievements of our time.

Fred

Another caveat to the 'ordlery bankruptcy' crowd is that most of the research/intellectual property concerning alternative energy vehicles is held by those same companies that are being rushed into liquidation/re-organization. Do we really want all that intellectual property sold off to foreign companies, sovereign investment funds etc.?

Shrike58

I have nothing against people having a big car. However, I do have a problem with allowing trucks and SUVs to be so inefficient; that is what's unacceptable.

I also have to admit that I'm a little bit predjudiced, seeing as my old man still draws a pension and medical benefits from Ford Motor.

Harper

The use of TARP funds to nominally bail out the Big Three is actually a bailout of the banks and other big institutional investors, who hold hundreds of billions in both GM and Chrysler corporate bonds, as well as the derivative contracts linked to the bonds. This is really a financial swindle, and has the added dimension, if you read the fine-print of Bush's press conference announcing the $17 billion, of demanding that the Big Three force UAW workers to accept big cuts in wages and benefits, plus further cutbacks in the workforce and production. The net effect will be a loss of jobs, and an opportunity for the Japanese, Korean and German auto companies that manufacture cars in the Southern States to cut their wages. In the past, they kept wages at an acceptable level, because they did not want to have the UAW come in and unionize their shops.

I don't think the issue is the size of cars or the quality of the Big Three products. The U.S. desperately needs big infrastructure modernization and expansion, and the machine tool capacity of the auto sector is one of the major resources. The auto plants used to produce cars, trucks, railroad cars, locomotives, tanks, APCs, etc. The Big Three used to be big defense contractors, and they had a diversified capacity to produce almost anything that could be cranked out of machine tool design and assemby lines. If we are going to get out of this underlying economic crisis, we need to build our way out, and the auto sector could use dormant capacity to do that. We need hundreds of nuclear power plants over the next decades, repair of our inland water system, and 50,000 miles of new highspeed rail and maglev, to truly bring the U.S. into the 21st century.

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