July 25, 2008 | posted by Michael Baxter in Automobiles, Oil | comments (0) |

Honda put its headlights on full yesterday. And in the brilliance of their light, we saw the oil market for what it really is, an unsustainable bubble.

Meanwhile, the National Institute of Economic and Social Research (NIESR) put its fears on the price of oil into gear. And warned we have got to pay for expensive oil through lower wages.

But maybe though, that thinking is wrong. Maybe we need to put our thinking on oil into reverse gear.

While all around, car makers are raiding their Thesaurus looking for alternative words to awful, Honda has just announced an 8.1 per cent jump in quarterly profits. It is yet more evidence of how we are adjusting to the high price of oil through changing our behaviour.

In the US, the company showed just how fit for purpose its strategy is, literally so, because it was Honda’s Fit, and Civic, that topped sales.

So far this year, Honda is the only car maker to see sales increase. In both May and June the company enjoyed higher sales than Chrysler, making it number four in the US.

Honda is also benefiting from surging sales from ventures in China and other Asia countries – so, all in all, it is just about doing things right at the moment.

But the Honda performance is an indication of something deeper too.

As has been argued here before, in the long-term demand for oil does fluctuate with price. To put it in economics speak, in the longer-term the price elasticity of demand for oil is quite high.

That’s why demand for oil is set to plunge – and why it has been predicted here that the black stuff will fall back to $70 by the end of 2010.

Still on the subject of oil, yesterday, the National Institute of Economicsand Social Research (NIESR) said that at current prices oil knocks around ¼ per cent off GDP each year.

But that is without taking into account the effect the cost of transporting goods must be having on international trade during this modern era.

The NIESR went on to announce some intriguing figures on the makeup of energy costs to the economy overall.

It said: “Real wages will have to grow ½ per cent less for next three years in Europe in order to compensate for the changing terms of trade caused by rising oil prices.” And looking across the pond, it said: “High US oil dependency means real wage growth has to slow 1 per cent.”

But is that really right?

At current prices, the cost of fuel is making life very difficult for some of us. Those who drive to work are really feeling the pinch – and public transport is not always a sensible option.

Do you remember when Margaret Thatcher’s government upped VAT when it got into power? The move was considered by many economists to be suicidal at a time of inflation. But they were wrong.

Inflation is not caused by rising costs. Rising costs are a symptom of another problem. Inflation is caused by demand exceeding supply. And for many people, oil at current levels means their spending on other goods and services is falling, and falling fast. This is deflationary.

As for trade – the falls in the dollar and pound will be making it much easier for exports in these economies. The real issue regarding trade relates to the value of the yuan, and the yen, both of which are rising.

June 23, 2008 | posted by Michael Baxter in Automobiles, Oil | comments (0) |

Well it does smack a little of the bleeding obvious.

Yesterday, Ford chief, Alan Mulally said: “Demand for large trucks and SUVs [is] at one of the lowest levels in decades.”  He went on: “We view the move to smaller, more fuel-efficient vehicles as permanent, and we are responding to customer demand.”

Ford, like GM and Chrysler, is suffering.    Sales at the big three were down 15.8, 27.5 and 25.4 per cent respectively in the year to May, suggests data from Autodata.

Meanwhile, the Japanese companies, with their more fuel efficient cars, are seeing sales rising.

That Ford has finally woken up to this reality shows that demand in the US for oil will adjust too.

But it takes time. It takes time for car manufacturers to shift from one type of car to another. 

Ford is due to launch a new pick-up truck, for example.   It delayed the launch for two months, but in truth probably wishes it had put its resources elsewhere. 

But that decision was made years ago.

Speculators, on the other hand, can change tack on a sixpence.

There are two ways you can get down from a cliff to the beach below.  One way is to do a bungee jump.  The other way is to walk down some steps at the side.  The beachside café will only really make money when the steps have been built.     Speculators are busy doing bungee jumps, but it is the underlying forces that will really shape the long-term price of oil.

January 11, 2008 | posted by Michael Baxter in Automobiles, Oil | comments (0) |

As you probably know, Indian company Tata Motors, revealed the world’s cheapest car earlier this week.

Tata, which is also currently seen as sitting in poll position in the race to buy Jaguar and Land Rover from Ford, says it can sell the car for 100,000 rupees or $2,700 (£1,300).

It’s good news, surely; the car will mean that millions of Indians and other people across the developing world will suddenly find they can afford a car. (The vehicle will, however, need some tweaking before it meets safety standards in the West, meaning that we won’t be seeing the little wonder machine around the streets of Britain for some time.)

But not all are impressed. Some point to the lack of safety features in the car. According to The Times, India already, “has 8 per cent of the world’s vehicle fatalities and less than 1 per cent of its cars”.

Others point to the car’s likely impact on the environment. The India Daily said, “The $2700 car from Tata is a dream for Indians. But it comes with a false American dream that can push India towards environmental catastrophe.”

But here is the irony. The new car is yet another example of how the developing world is exerting a deflationary effect on the global economy. Presumably other car manufacturers will try to match the Tata move, and the price of cheaper cars will fall.

And as, literally, billions of, or at least a billion, people join the world’s consumer society over the next few years, cheap cars, such as the model announced by Tata, will have helped facilitate a massive rise in vehicles on the world’s roads, creating even greater demand for oil.

Many argue that the price of oil is bound to fall soon, that supply can easily meet demand, and yet the Tata announcement shows how great the potential for future demand for oil is.

It also illustrates how two contradictory forces are at work. India and China are helping keep global inflation down through supplying cheap goods, but at the same time are pushing inflation up through demanding oil, not to mention other commodities.

It also goes to show the error in the argument that oil inflation does not mean interest rates should rise, because it is a one-off. In fact, oil inflation is the flip side of deflation in manufactured goods. You can’t dismiss oil inflation as a one-off, and then point to all the other deflationary forces as a reason to cut interest rates, when these other forces are just as much a one-off.