February 6, 2008
When I first started this website, it was my intent to offer a unique perspective on the automotive industry and to broach subjects not commonly touched upon by the automotive press or the majority of the analysts who cover the industry. One of the subjects that I have been very persistent about has been fuel economy. Since I have started this site I have written and discussed this issue numerous times. Why? Personally, I believe this is the most pressing issue the auto industry will face over the next decade.
For starters there is the environmental impact with regard to emissions and the link between global warming and burning fossil fuels. There is also the political impact of countries being dependent on foreign oil. Last but not least there are the serious consequence of the world reaching maximum oil production. This will result in more political instability around the world and further escalation of fuel cost.
Petroleum industry experts and analyst have been predicting world oil consumption will soon exceed the capacity of the world’s ability to produce oil. More recent analysis indicates that may have already occurred in 2006. Although, there may be some disagreement or debate as to the exact date of peak oil, the world cannot maintain its current consumption of oil without consequences. Furthermore, this will adversely affect the automotive industry as the volatility in the price of oil increases. Right now, there are no other near term viable solutions that can replace oil. That I see is at the heart of my discussion.
According to the Department of Energy, total petroleum use in the US rose from an average of 17 million barrels per day in 1990 to 21 million barrels in 2004, an increase of 24%. In 1998, with oil at $11 per barrel, the US paid approximately $45 billion for its imported oil. Fast forward to 2007, with oil hovering around $100 per barrel, the cost to the US was approximately $400 billion. Oil constitutes the single-largest contribution to America's balance-of-payments deficit and a substantial transfer of wealth from the US economy to those of oil-producing nations.
Even the petroleum industry is beginning to come around and acknowledge the uncertainty with regard to the future of oil and the potential radical changes that may be on the horizon. Recently, Jeroen van der Veer, Chief Executive of Royal Dutch Shell plc, who also chairs the Energy and Climate Change working group of the European Round Table of Industrialists released a sobering statement on Shell’s website:
“By 2100, the world’s energy system will be radically different from today’s. Renewable energy like solar, wind, hydroelectricity, and biofuels will make up a large share of the energy mix, and nuclear energy, too, will have a place. Humans will have found ways of dealing with air pollution and greenhouse gas emissions. New technologies will have reduced the amount of energy needed to power buildings and vehicles.
Indeed, the distant future looks bright, but much depends on how we get there. There are two possible routes. Let’s call the first scenario Scramble. Like an off-road rally through a mountainous desert, it promises excitement and fierce competition. However, the unintended consequence of “more haste” will often be “less speed,” and many will crash along the way.
Regardless of which route we choose, the world’s current predicament limits our room to maneuver. We are experiencing a step-change in the growth rate of energy demand due to rising population and economic development. After 2015, easily accessible supplies of oil and gas probably will no longer keep up with demand.”
Why is all of this important? Because the very future of the automotive industry is at stake if they do not begin to rethink their business model and move quickly to move the automobile beyond petroleum dependent powertrains. If in the near future there was more then a temporary shortage of oil, the automotive industry as we know it could collapse when fuel prices soared. I hate to sound like an alarmist but I find the lack of serious public discussion on this issue more alarming.
The rise in fuel cost over the past two or three years has already had a significant impact on the public as they have shifted their purchases from the truck based SUV to more fuel efficient cars. This has also had a significant negative impact on the bottom line of US vehicle manufacturers. In 1999 Ford sold more than 428,000 mid-sized Explorer SUVs. In 2007, sales of the Explorer dropped to just under 140,000 vehicles. In that same period, Toyota went from selling just over 5,000 hybrid Prius’ to just fewer than 200,000. This shift in buyers preferences resulted from only about $1/gallon increase in the cost of fuel.
What happens when there is real increase in the cost of fuel because of a more permanent disruption to the supply. I just do not see a sense of urgency beyond the usual rhetoric. Do not get me wrong, as I have seen the recent emphasis on fuel economy from industry. Yet, I see only reaction and not a proactive discussion. The US automakers and pundits are just not facing the real issues:
"Gas prices would have to be $13 a gallon in today's world for consumers to demand a fleet where half the vehicles achieved better than 35 miles per gallon," Chrysler LLC economist Paul Traub said after addressing the Society of Automotive Analysts this month.
"Americans still want to go to Wally World on the weekends, and we don't want to leave our grandmas and dogs at home," he said. That means automakers must make vehicles that can still carry seven passengers and haul a boat, but meet more stringent fuel economy standards. Chrysler estimates such technology would cost $6,000 to $7,000 per vehicle, Traub said, a sentiment echoed by General Motors Corp. Vice Chairman Bob Lutz.”
“In a highly competitive market, car companies are unlikely to be able to pass that cost on to the consumer, said Erich Merkle, vice president of forecasting at IRN Inc., who tracks vehicle sales trends. "If the consumer isn't demanding those massive leaps forward, but automakers are forced to produce it, the automakers will have to absorb those costs," he said.
And GM's Vice Chairman Robert Lutz has recently said the following at a speech at the 2008 Automotive News World Congress:
“People still have need for trucks in this country. People still buy them for work. People still want them to haul boats and horse trailers. Everyone is not going to suddenly switch into Smart Cars, or Saturn Astras, or tiny little pickups, unless they suddenly decide to haul tiny little horse trailers carrying tiny little horses.
For example… look at the differences in automotive purchase behavior between Europeans and Americans, which is basically dictated by the price of gasoline.
Here are two cars basically off the same architecture. One sells here for around $13,000 and frankly, it’s not breaking any sales records, even at that price. The other sells for more than $30,000 and it’s Europe’s second-largest selling car.
Why is that? Well, it’s because Europeans, at their fuel prices, are willing to pay premium prices for premium small cars that deliver terrific fuel economy.
That is not the case here in America, land of the big truck and big horse.
Nor will it magically become the case once the fleet we offer for sale hits a 35-mile-per-gallon average. It will only be the case if gas prices rise sharply to levels near what they’re paying in Europe.”
I find most of the above statements just absurd as the issue is not the market or the customer but the fundamental ingredient the industry needs.
My thoughts on this subject are not based on the answers I have but the many questions I feel have to be vetted in the public arena.
What would happen if the price of gas would hit $13/gallon? Could the automotive industry retool plants to produce small cars? That is a 2 – 4 year proposition. Demand for vehicles would drop off a precipice. Are some of the smaller companies even viable if industry demand retracts back to 1991 levels in the US at 12 million vehicles? What happens to that excess capacity when compared to the recent 17 million sales per year? What manufacturers can survive is there really is a sharp decline in global vehicle demand?
If manufacturers develop new technologies that cost $6,000 to $7,000 per vehicle, a manufacturer cannot absorb that investment and function as a viable company. As a result, demand will have to decrease as increases in prices push vehicles out of reach. This also assume companies have the technologies available to implement in their fleet quickly. This could very well require a 4-8 year lead-time.
What about alternative bio-fuels? Given enough time, the bio fuel infrastructure should be in place but what happens if it is not? What happens if peak oil is reached before the fuel making capabilities are in place?
In many ways this is a speculative discussion but the questions that need to be answered are very real. I can only hope there is a serious discussion soon, where industry confronts its near term worst nightmare. An industry with limited oil!
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