Detroit Implodes

The Detroit auto industry appeared to be imploding Thursday.

Strong words starting out this USA Today article on the "downward spiral" of the US auto industry. There's a bit of a perfect storm going on for the industry, from a weak economy, bad credit markets and declining housing values wiping out a lot of wealth for working class Americans. But the overarching cause was to be found on the front page of the same day's paper:

Oil futures climbed briefly to a record above $142 a barrel on Friday...

Which would explain, back to the first article, why:

Consumer Reports magazine said Thursday that its latest survey showed that 80% of Americans aren't planning to buy a new vehicle in the next year. Of the few who say they are, 0% — none, zip, nada — say they'll consider buying something bigger than they're driving now.

The era of big cars and trucks is coming to an end. Those are the vehicles Detroit is geared to make and make money off of. The article ponders whether Detroit can weather two years in a row with the kind of sales declines they're facing. One industry expert made excuses:

"You could say they should have built these smaller cars and more fuel-efficient cars, but nobody saw these gas prices coming a year ago," Conway says. "You can't create a car to deal with $5 gas in one year. The guys who had those cars kind of lucked out."

Hm, in about two minutes of googling, I found a 1992 report on how the US auto industry needed to increase fuel efficiency to compete with Japanese car manufacturers. And a 2005 article on how US car manufacturers were fighting like hell to stop states from requiring greater fuel efficiency.

In 1993, when President Clinton gave the auto industry $1 billion to research building a fuel efficient car, rather than require them to actually build more fuel efficient cars. Fuel efficiency proceeded to decline to its lowest in 20 years.

GM decided to scrap the EV1, a commercially available all electric car in the 90s, probably because electric cars don't break down and so earn a lot less in the lucrative after market.

Yeah, just bad luck that Detroit got hooked on bloated short term profits selling gas guzzling small trucks. That they paid off Washington to remove said trucks from being held to any fuel efficiency standards. And the Japanese? Just lucky on the hybrids and greater fuel efficiency cars.

Detroit's luck is likely to get even worse if the projections of peak oil theorists is right and we are actually about to see, or are already seeing, a decline in the amount of oil capable of being produced. To call peak oil a theory isn't really accurate. No one would argue that oil is infinite, therefor it must run out some day. Much of the world, including the US in 1972, already passed peak oil capacity. The question then is when overall capacity, including OPEC countries, is going to peak (or when it did).

Shut out, for a moment, all the talking head blather trying to explain the current price of oil. If you think about supply, it all starts to make sense. Demand is rising, production is flat or falling most places, therefor prices will keep rising. Even Saudi Arabia, which keeps promising to pump more oil, hasn't actually come through.

This doesn't mean there won't be any short term declines in oil prices, but it does mean the trend will be ever higher. It means there's a good chance we're already at the end of the age of cheap oil, the age that brought us the industrial and green revolutions. That means everything is going to change.

Krugman at the New York Times, lays out the same case on oil though without looking at the possibility of peak oil. Rising demand from developing economies alone is enough to ensure a steady upward trend for oil prices.