2006 Auto Industry Outlook from WSJ

Five issues identified in the WSJ 2006 Auto Industry Outlook are:
* Future of GM
* Fuel Economy (and Hybrids)
* Boom in Luxury car segment
* Resurgence (?) of small (compact?) cars, and
* Crossovers are the new SUVs

It is clear that US auto industry is in for some rough weather over the next two or three years. In that time, GM and Ford will continue to downsize and will perhaps emerge as nimbler organizations. GM might be the starve off chapter 11 following the sale of GMAC.

Arrival of Camry hybrid model and several hybrid models as well as smaller more fuel efficient gasoline ICE vehicles will indeed challenge the US consumers to put their money where their mouth is. On the other hand, if we see another year of volatility in oil prices like 2005, these more fuel efficient vehicles may indeed become popular. There is also likely to be a move in both the Congress on passenger car CAFE standards as well as NHTSA on light-truck CAFE standards. I will be watching this more closely than other issues.

I really don't have anything to say about the luxury car sales.

As for the crossovers, the trend has been clear now for the last couple of years. Large SUV sales are in a big decline after having peaked in 2001/2002. Crossovers, which are cars disguised as SUVs, having been growing in popularity already. With high gasoline prices ($ 2.35 a gallon on average for the year?) we may see that trend accelerate.

Ford Report on Business Impact of Climate Change

(cross posted on TechPolicy)

In response to a shareholder resolution urging the company to outline its strategy to deal with climate change, Ford Motor Company has released a report on Business Impact of Climate Change. Related WSJ article here.
As such you may not find anything new in this report, specially if you were looking for specific targets and so on, but yet it is an interesting piece of document. Firstly, Ford has embraced "Fuel+Vehicle+driver" formula:

Within the road transport sector, we see the opportunities to reduce in-use GHG emissions defined by three inter-related factors:
• The embedded carbon content of the fuel available to consumers.
• The carbon efficiency of vehicles.
• The purchase decisions and driving behavior of customers, including vehicle miles traveled
This “fuel + vehicle + driver” formula underpins our engagement with both fuel companies and consumers in addressing the GHG challenge.

Readers of this blog may find this argument vaguely familiar.

Secondly, Ford has very nicely outlined the constraints faced by the auto companies:

...our business involves a long product lifecycle with greenhouse gas emissions that vary at each stage.
...we face at times conflicting regulatory, market and technological signals. The picture varies by geography, market segment, and demographic profile. (Some times) governments are often tempted locally to encourage specific technology solutions, but there is considerable uncertainty about which technologies, combinations of technologies and technology pathways will prevail and over what time frames, ...some policy makers favor demand-side measures such as fuel taxes and Green Public Procurement policies, while others prefer supply-side controls such as fuel-economy or GHG emissions standards, creating significantly different market dynamics and product strategies from one region to another.
...the GHG footprint of the in-use phase of light duty vehicles must be measured on a well-to-wheels basis, that is, the total emissions from the production of the original source of energy (e.g. crude oil, bio-fuels, etc) into a usable fuel, the amount of energy consumed to produce the vehicle, to the fuel consumed by the vehicle during its in-use lifetime.
...the automotive industry operates on long product development times and major capital investments.

All of these points are well made. The heart of this argument is that there are inherent business risks in trying to respond too enthusiastically with all the market and regulatory uncertainties present.

Third, Ford's take on policy matters is in favor of emissions trading system:

...(emission) reduction programs should be based on upstream, carbon trading systems that establish reasonable, gradually reducing the limits on carbon
introduced into the economy. In addition, they must include a safety valve that is based on economic/energy indicators that would allow for the
release of additional emission allowances at reasonable prices to avoid unintended constraints on economic growth, maintain price stability...

Economists would argue that an upstream carbon trading system would be most efficient. Oil and Gas companies are not always happy with the upstream system though. This brings us to the part of the report dealing with stakeholder issues (taken from Ford's sustainability report):

Many factors influence greenhouse gas emissions from vehicles, and many institutions and individuals influence those factors. (click on picture for a larger image)

... to have meaningful, long-term impacts, global patterns of consumption of fossil fuels must be changed. For the transportation sector, this will require not only improvements in fuel economy, but also changes in fuels, infrastructure, mass transportation and driver behavior, as well as a reduction of the overall number of vehicle miles traveled.

Again, this is an argument that readers of this blog should find familier.

What is to be made out of this report? Frankly, not much, but it is a step in the right direction. The reality is that we are going to have to deal with how to respond to climate change sooner or later. Some tough decisions will have to be made. The sooner we prepare ourselves to make those decisions the better off we will be afterwards.

Impact of AEO estimates of Oil prices on proposed CAFE standards for light-trucks

Silly of me not to thought about this before, but buried deep inside Tuesday's WSJ was a short piece on how the significantly higher AEO estimates on oil prices could have important consequences on NHTSA's proposed light-truck CAFE standards.

...(EIA estimate) also raised its forecast for gasoline prices, a value that figures into the government's proposed new fuel-economy standards for trucks and SUVs. The toughest of those standards, for model-year 2011 vehicles, is based on gasoline prices of $1.51 to $1.58 a gallon beginning by 2008 from EIA's outlook last year. The outlook released yesterday bumps those prices to a range of $1.99 to $2.20 for the same time period.

Auto makers already were grumbling that proposed fuel-economy standards would be tough to meet. "The current proposals are a challenge," said Chris Preuss, spokesman for General Motors Corp. He declined to comment on the impact of even higher targets.

..."If they're going to be intellectually consistent with the methodology they proposed, they would have to set higher standards," said Eric Haxthausen, an economist with Environmental Defense, an environmental-advocacy group based in New York. His organization has tried to replicate the National Highway Traffic Safety Administration calculations and estimates that the new gas prices alone would bump up the targets by one mile a gallon.

This means that light-truck CAFE standards could be bumped up to around 24 or 24.5 mpg by 2010 (rough estimate for a schedule 22.7 mpg for 2008, 23.5 for 2009). This would further reduce the gap between light-truck CAFE standards and passenger car standards which are currently frozen at 27.5 mpg. Onus has been on the Congress for quite some time now to take up the issue of light-duty vehicle fuel use either though CAFE or other means.

In the mean time, car companies who have been betting on their fortunes on light-trucks (you know who they are) will see their profit margins sqeezed further unless they are able to pass on the costs to the consumers without a drop in sales. Combine this with possibility that we might see gasoline price spikes, like the one after KatRita, due to various reasons and the stage is set for a very turbulent couple of years in terms of auto sales.

$ 55 as the new floor for oil prices?

This Week in Petroleum sums up three different takes on medium to long term oil prices and concludes that if there are still any illusions about going below $40 a barrel any time soon, we should get over those.

Earlier this week, three different organizations outlined their views of the future in global oil markets. Perhaps most interesting, was that each of the three looked at different future time horizons, resulting in different conclusions.
...as OPEC looks towards the first quarter of 2006, it foresees global oil markets as being well supplied, albeit at much higher prices than seen previously during this time of year.
...the AEO2006 reference case includes much higher world oil prices than were projected in AEO2005. In other words, EIA expects oil markets to remain tight (meaning spare production capacity will continue to remain low, both upstream and downstream) causing oil prices to remain elevated for the foreseeable future.
...(Oil Market Report) OMR highlighted the IEA’s view of oil markets through 2010 and concluded that there is “ … no strong evidence of a significant change in current [oil] market conditions over the next five years.”

The cat is out of the bag, I guess. I hope that spinning will stop now.