Cheap Oil Forever? – Disaster for the (Auto) Industry!

Mike Smitka, Economics Dept, Washington and Lee University

The global auto industry is placing very large bets on the value of lightweighting and vehicle electrification. They may lose these bets.

...the industry may lose its expensive bet on new technologies...

In a previous post from April 2014 I argued that we were seeing "peak oil" in economic terms, as extraction costs (and hence the base price for petroleum) were rising. Again, this was an economic definition, because improvements in exploration technology has led to a steady increase in known "physical" reserves. To reiterate: my main point-cum-assumption was that, whether or not the level of reserves continued to rise, the cost of extracting those reserves would. Energy prices will remain cyclical, affected by swings in demand and the impact of short-run surges in drilling. But the underlying trend would be for each peak (and trough) to be higher than the last. That was overall good news for the auto industry: regulators in the main markets were pushing for a combination of higher fuel efficiency, lower emissions and enhances safety, for none of which had consumers in the past been willing to pay. So absent high prices, the industry was headed to producing a mix of cars (and, in the US, light trucks) that consumers would be reluctant to purchase.

Really, now: the Fed and "Breaking News"?!

Mike Smitka

I was having lunch at a brewpub in Kokomo IN last Wednesday (Dec 16) as the multiple screens over the bar proclaimed "breaking news." Really? How is it that it is "news" that the FOMC voted to raise its short-term interest rate target to 0.25%?

The FTC Opens the Hood

Ruggles December 2015

I hadn’t intended to write this as a standalone piece. And I am guilty of using the title to the post, published on the Federal Trade Commission website: The FTC Opens the Hood

I wrote a lengthy piece on their site rebutting some of the assertions made by authors Tara Isa Koslov, Office of Policy Planning, and James Frost, Bureau of Competition. For some reason, as of this writing, the FTC has chosen not to publish my comments in reply to their original post. So here we go, point by point.

The FTC: For many of us, the holiday season involves at least one loooong automobile ride. We travel over the river and through the woods in our beloved cars, our trunks stuffed with presents for family and friends. Today, the way we buy those presents and the way we buy the car that carries them look very different. While the retail landscape has changed dramatically in the last 50 years, the system of automobile sales in the United States has stayed mostly the same. Are consumers benefiting from the current distribution system for automobiles or are changes needed? In an upcoming public workshop, FTC staff will explore this question and related issues, with a focus on the regulatory environment governing automobile distribution.

Frost and Koslov seem to be saying they are puzzled by the fact that a consumer can buy Christmas gifts, toys, jewelry, gadgets, etc. while buying a vehicle involves having to go to a car dealer, a process they seem to think is “antiquated.” One wonders if they realize that buying a vehicle involves trade-ins with negative equity, complex financing issues based on a myriad of credit scores and the associated “tiering,” debt to income ratios, loan to value issues, state inspection and registration issues that impact state sales tax issues, not to mention service after the sale issues. One can’t exactly package up one’s new car and mail it back to the factory to get a window leak repaired.