Tuesday, January 24, 2006

Uh Oh - Oil Traders Beware... 

The New York Times has slipped an oil market prediction, albeit a weak one, into an editorial critical of Detroit's auto manufacturers. Far be it from me to defend the business practices of GM and Ford. They've made too many mistakes to count over the last 50 years. But the Times definitely misses the point of what ails the US auto manufacturers, while it tries to score political points on fuel economy.

What has broken Detroit is much the same problem that has crushed the airline industry. High labor costs, excessive financial leverage and unsustainable defined benefit pension obligations have made the US automakers insolvent. They simply cannot be a low cost manufacturer of high volume, low cost cars (which tend to be fuel efficient). Their embedded cost structure is a historical artifact that can only be rectified by bankruptcy. They need to void their union contracts, reduce their debt obligations and reconfigure their pension liability. Once they've completed that awesome task, maybe they will be able to rationalize their production capacity sufficiently to compete with Asian and European manufacturers.

The irony of the NYT backing up the UAW's criticism that Detroit should "design better cars" is pretty laughable. NYT editors may not like them, but between 15 and 16mm cars are sold each year that they make. So somebody likes them. To say the UAW has an axe to grind here is so absurdly obvious, it is remarkably obtuse of the NYT editors not to acknowledge their bias. So much for introspection and balance (not to mention business acumen).

As the Times went to press, oil prices were around $68 spot (US WTI). It's down $1.10 today. TH, it may be time to sell your oil company investments...


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