Oil Prices surge and Auto makers plight

For two years, US automakers have told investors, creditors and workers to remain patient with a wrenching, industry wide restructuring because a turnaround was just around the corner.

But with oil prices surging the US auto market bumping along at near decade low and even more Americans defecting from trucks and sport utility vehicles, a new risk looms for Detriot: the future may be slipping out of its control.

Ford Motor’s warning that it would miss its goal of returning to profitability in 2009 underscored the growing economic pressure on the battered industry.

For now, Ford, General Motors and Chrysler have the cash and credit to weather a continued slump as they play for time by selling more assets and raising financing, according to equity and credit analysts.

The have some levers to pull and some time to work it out. But if the US auto market fails to bottom out in 2008 or if oil prices rise unabated, the threat of failure grows in an industry struggling with third straight year of lower sales.

Toyota Motor and Nissan Motor have also both warned that the US industry would hurt results, but both remain profitable and neither relies as heavily on truck sales as the Detroit there. In the meantime, US gasoline prices have been climbing steadily and as the average price crossed $3.50 per gallon this month. Ford saw signs of worse trouble ahead.

Auto makers saw a real change in the industry demand for pick up trucks and SUVs in the first two weeks of May. It seemed for auto makers they reached a tipping point where customers began shifting away from these vehicles at an accelerated rate. GM, Ford and Chrysler has already seen their combined share of the US market slip below 50%. By contrast, at its recent peak in 1980, GM alone had 45%.

But Toyota overtook Ford as the number two player in the US market in 2007, and Honda Motor is on track to unseat Chrysler as number three.

Driving that giant is the market leading fuel economy of Honda’s fleet and a line up that relies on light trucks for about 43% of sales versus Chrysler 68%. In the short term, all three companies will suffer from misaligned product portfolios. A critical of the strategic thinking in Detroit, questioned whether the crisis had fully sunk in, even now. US auto sales are on track to drop as low as 15 million units this year, a sharp contraction from 16.15 million a year earlier that none of the major auto companies had called heading into 2008.

Oil alternatives must be accelerated:

Considering the economic scenario and Auto makers’ plight, a surge in the price of crude is threatening global growth for the first term in decades and spurring a desperate surge in interest in energy alternatives and new technology to keep conventional oil flowing.

How companies and governments navigate the treacherous energy landscape which some analysts liken to that of the 1970s and 1980s will shape the future of the global economy and potentially tilt the geopolitical balance.

What happens ten years down the road will be determined by the decisions made on energy today. Countries need to get serious about the underlying problem of demand for oil.

Oil prices have doubled in a year to around $130 a barrel a rapid increase in consumption in China and other developing countries strain supplies, and some analysts have said crude could top $200 a barrel by 2010 as the market remains tight.

While the boom has helped big oil producing countries, particularly Russia and parts of the Middle East, there are signs the major consumers – the United States and parts of Europe and Asia are starting to crack under the strain.

High prices are hitting motorists at the pumps, hobbling energy intensive industries like airlines and freight and feeding broader inflation including price hikes for food that have led to protests and even in extreme cases riots around the world.

The oil price is unsustainable. A point is reached now where significant responses from consumers are starting.

The silver lining could be in how the world fights back. Whereas in the ‘70s, governments looked mainly to conservation, this era is looking to increased investment in alternative energies and better oil field technology to reach more resources.

In a sign of the shifting mentality, legendary Texas oil man T Boone Pickens who made billions betting on higher oil prices has gone green with a plan to spend $10 billion to build the world’s biggest wind farm.

Energy analysts say that record US crude oil prices have reached a break point that will spur a shift away from an oil-centric transportation sector toward alternatives.

Alternative fuels have already made big inroads into energy markets, with ethanol making up some 7% of the US gasoline pool thanks to government mandates and subsidies.

Americans have already tapped the brakes on their notoriously voracious road travel and are also starting to buy more fuel efficient cars in a shift away from SUVs.