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Politics, Production & Petroleum

Rising demand means rising prices at the pump. Ipso facto.

If you think back to the time a few years ago when Rick Wagoner and Bob Nardelli (we’ll give Alan Mulally a pass on this one because he didn’t have the Oliver-cup-in-hand) were sitting in front of a crabby cadre of Congressmen, it seemed as if that was the moment when the auto industry became political. It surprised me how unconnected the OEM execs seemed at the time. Given the enormity of the industry and its impact on the economy, I had thought that they would have been wired and consequently treated with at least a modicum of deference. But no, there they were, being rather soundly chastised. “Thank you, sir, may I have . . .”

A couple years later, when Toyota’s alleged quality problems were elevated to national attention, Akio Toyoda was on Capitol Hill. Again, it was a case of the politicization of the auto industry in some regards.

Although the managed bankruptcies and the NASA-level quality investigations are behind us, automotive again is part of the political landscape. No, I am not talking about who is right and who is wrong vis-à-vis whether the loan guarantees were a good idea (Obama) or not (Romney). No, the concern is with fuel prices.

Oddly, there are a number of people who think that the rise in fuel prices has more to do with government policy than with the global petroleum market. Somehow, these people, many of whom are all about letting the invisible hand do its prestidigitation, lose sight of the fact that if BP or some other company put a well in their backyard they wouldn’t suddenly have the price at the nearby gas station go down as the oil flows up. That oil is going to become part of the world petroleum market and it is as likely to be coming out of a nozzle in Mumbai as Milwaukee. Or, they don’t realize that while there is oil to be found in things like oil shale and tar sands, this isn’t in the least bit like what happened when Jed Clampett was out “shootin’ at some food.” Extracting the good stuff from the rock or muck is more costly than what happens when “up from the ground came some bubblin’ crude.”

To be sure, the government has an effect on the price of gasoline through such things as regulatory policies and taxes. Were the costs of things like fighting wars in the Middle East wrapped into the price at the pump, chances are good we’d all be walking more.

But there is another factor that is pretty much a game changer, which is that there is a growing auto industry throughout the world. And as people buy more cars and trucks, they’re buying more gas, too. And with the increased demand comes increased prices—across the board. And when you look at what’s going on around the world in terms of vehicle production, well . . .

According to the International Organization of Motor Vehicle Manufacturers (oica.net), in 2011 world auto production reached 80.1 million vehicles. That’s a record. It is up 3% compared to 2010. And for 2012, the OICA projects an additional 3% increase in global production. The U.S. had a good rise between 2010 and 2011. According to the OICA, there were 2,966,133 cars and 5,687,427 commercial vehicles produced in 2011, or a total of 8,653,560 units. That is a production increase of 11.5%. Which is pretty good. By point of comparison, the production increase in China was a mere 0.8% according to OICA figures. But there’s mere and then there’s, well, this: 14,485,326 cars and 3,933,550 commercial vehicles, or a total of 18,418,876 units produced in 2011. If we look at NAFTA instead of just the U.S. alone, there were 2,134,893 units out of Canada and 2,680,037 from Mexico, or a total of 13,468,490, which is well south of that Chinese total.

Economists often reference the developing power of the “BRIC” countries. They are Brazil, Russia, India, and China. In Brazil there were 3,406,150 vehicles produced in 2011. Russia produced 1,988,036, and India 3,936,448. Germany, which is by far the biggest vehicle producer in Western Europe had a nice 6.9% rise to 6,311,318 vehicles. Japan, which had to deal with the consequences of natural disasters, had a decline in production of 12.8%, but still produced 8,398,654 vehicles, or about an assembly plant’s worth less than the U.S. production. South Korea’s production rose 9% to 4,657,094 vehicles, which is approximately the production of Canada and Mexico combined (4,814,930).

Although all of these numbers can cause one’s eyes to glaze over, the point is simply that with the number of vehicles being produced in countries around the world on the rise, and that rise being bigger regarding percentages or volumes than in the U.S., the demand for petroleum is going to have a concomitant upswing no matter who is at 1600 Pennsylvania Avenue.

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