A few years back peak oil all seemed so simple.
Worldwide oil production was going to stop growing; shortages were going to develop; prices would go higher and higher; demand would drop; prices would fall; demand would increase; and the cycle would repeat itself. Each repetition would send prices higher than the one before as more and more people would be forced out of the oil age.
Last summer, it looked as if this scenario were happening. Oil prices, which had been rising slowly for several years, suddenly shot up to $147 a barrel causing all sorts of economic havoc. Weak airlines dropped like flies! New car sales plummeted! Politicians postured! The Saudis opened the oil tap a bit! Exactly why this price spike was happening became a matter of national debate.
Many thought it was caused by speculators. Others blamed environmentalists for keeping us from all that oil waiting to be drilled just off our beaches. A few even thought that demand for oil was actually getting ahead of supply and noted the surge of Chinese imports in preparation for the Olympics.
We are going to have to let the historians sort out the causes of the great spike, for oil prices soon dropped even faster than they had gone up. Just as oil prices were spiking, economic activity was dropping. A year ago we were debating the possibility of an economic downturn. Now we are looking for the bottom of a major recession or perhaps something worse. It seems that for the last 30 or 40 years we have been extending ourselves ever increasing amounts of credit. It had to stop somewhere-and it did – just as world oil production was peaking.
The economic waters have become so muddled with bursting bubbles, lost jobs, closing factories and failing banks that it is difficult to see clearly, much less attribute blame for the increasing ills befalling us. Many believe our current problems are from too liberal an extension of credit and can be cured with a firm dose of regulation. Others, wondering why an American mortgage crisis could spread so rapidly to every corner of the globe, are saying high energy prices deserve more of the blame. Again, we shall have to wait for the historians to sort this out some decades from now.
The crisis du jour, however, is America’s automobile industry. With new car sales now approaching only half of what they were a few years ago, the manufacturers are surviving on billions in federal aid. The Obama administration, realizing that the people and the Congress are unlikely to tolerate a permanent multi-billion dollar monthly dole to Detroit, is in the midst of pulling the plug.
Last week Chrysler went into bankruptcy and unless GM can reorganize itself satisfactorily before the end of the month, seems likely to follow Chrysler. While government and industry officials talk optimistically of quick 30 to 60 day bankruptcies that will cleanse the companies of unprofitable factories and liabilities accumulated over the decades, others are not so sure.
Chrysler is asking the judge to let it set up a new company to be called of all things “Chrysler” and to let the new company pick just which assets and liabilities from the old Chrysler that will return it to profitability in a few years. The rest of the factories would be sold off, or more likely scrapped, and much of the old Chrysler’s debts and obligations would become close to worthless. The only liabilities that the new company must have would be car warranties without which the new Chrysler would be instant toast.
Needless to say, those secured lenders that are not under the thumb of the U.S. Treasury’s TARP program are screaming bloody murder about their billions in secured loans becoming worthless. There have already been death threats, and lenders have asked the bankruptcy judge to scrap the proposed deal, but he seems likely to approve it anyway. It would all make grand theater if there weren’t so much at stake.
There are a number of issues that should be clearer in the next few months. Can car firms in bankruptcy continue to sell enough cars to survive? Can the matter be settled quickly enough to keep Chrysler, which is currently in suspension, from simply melting away? Can FIAT, which is also flat broke and is being given the company to run, really return it to profitability in a reasonable amount of time? What are the implications for GM which is only three weeks away from an out of court settlement or bankruptcy?
Chrysler, the rest of the U.S. automobile industry, and in fact much of the U.S. economy could be in a lot of trouble. Should Chrysler’s sales fall further in May or its bankruptcy bog down in protracted litigation, the company, the FIAT deal and hundreds of thousands of jobs are likely to disappear, setting off a chain reaction within the industry. The Chrysler melodrama will be replayed on a larger scale at the end of the month when GM faces its own deadline. With the federal government no longer willing to provide billions in monthly subsidies, and car sales too low to support the industry, it seems doubtful that letting FIAT run Chrysler, or cutting model lines and closing a few factories at GM can solve much of anything.
Despite optimism in the equity markets, those taking a hard look at the economy say that housing prices are likely to continue falling, foreclosures likely to continue increasing, and unemployment likely to continue rising for an indefinite period. In this environment the outlook for sufficient new car sales to support the size automobile industry currently envisioned is doubtful. This month’s bankruptcies/reorganizations are unlikely to settle the matter.