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The Peak Oil Crisis: The Great December Bailout

While waiting to see just how much OPEC says it will cut production next week, and then a couple of months more to see how much they actually cut, the crisis of the week is Washington's bail-out of Detroit.

The industry, of course, refers to this event as a "bridge loan" that will be paid back with interest in two or three years. Others see this as ridiculous and predict that keeping some vestige of the U.S. automobile industry afloat will run into hundreds of billions of dollars and will fail in the end.

In reading through the voluminous reporting and commentary on the bailout, one is struck by how complex the U.S. auto industry and its supporting chorus of parts suppliers, dealers, banks, credit unions, labor unions, lobbyists, members of Congress and you name it has become. This industry has economic tentacles into nearly every village and town in the country. Of course it is too big to fail, but can we do anything to prevent it?

Starting with the basics; automobile sales in the U.S. are not yet down to 50 percent from the 17 million cars and trucks of a few years ago, but they are certainly heading in that direction. When all the bad news about collapsing retail sales and job layoffs we have heard in the last few weeks plays out, the chances are pretty good that car and truck sales will be down to 50 percent of pre-crisis levels in the next year or two. The problem is that auto industry in the U.S. is a lot more than the three marquis manufacturers. The industry currently has thousands of parts manufacturers and roughly 20,000 dealerships across the country. If we are only going to be selling half the usual number of cars in the next few years, then thousands of these parts manufactures and dealers are going to disappear.

This week the Democrats in Congress, in conjunction with the Bush administration, are proposing an emergency $15 billion loan that will tide Detroit over until March when the new Congress and administration can take a serious look at "restructuring" the industry. So far nobody has laid out all the details of this "restructuring," but they obviously must involve getting rid of half the current employees, half the plants, half the supply contracts, half the dealers, the billions in debt, the union contract obligations and probably a lot else that has not yet come to light. Reductions of this magnitude obviously will take years and cost tens of billions of additional money, probably the governments, to accomplish in an orderly manner.

The only alternative is to pull the plug, liquidate the U.S. automobile industry, and let the consequences roll. Even for foreign car manufactures building and marketing in U.S., the results will not be pretty. Without orders from Detroit, the U.S. auto parts industry will contract leaving solvent manufactures of small efficient cars without their usual sources for parts. With the massive rise in unemployment that many foresee, new car sales are likely to contract further, perhaps making it difficult for the remaining manufacturers to find markets. The problems will roll on and on.

Those of us following the perturbations of the world's oil supply believe that in the next five or ten years worldwide oil supplies will start shrinking, prices will rise permanently, and the widespread use of the private automobile will start to decline. This will be either because liquid fuels will have become too expensive in comparison with incomes or perhaps because governments will be forced to impose fuel rationing to mitigate the consequences of shortages.

So what do we do with Detroit? As now seems likely, its future course will be increasingly controlled by the federal government. Currently the plan is for this control to be exercised by an auto czar tasked with making sure that the multi-billion government loans are not used to pay for excessive executive compensation or dividends on worthless stock, and that the companies move expeditiously to "restructure" so they will not become permanent wards of the state.

It is only a matter of time however that, no matter how well intentioned, the government's involvement in "restructuring" expands to corporate decisions about what to make and how to make it. Should the big three be consolidated? Should production of internal combustion engines be severely restricted in favor of electric propulsion? Should the auto industry return to making buses, railroad engines? As a harbinger of the future, the current bailout bill has a clause forbidding loan recipients from legally challenging state emissions standards. For an industry that for decades vigorously fought seat belts, air bags, pollution controls, and fuel consumption standards, big changes are in the wind.

There is however, a substantial body of opinion out there that there should be no bailout. Many in Congress believe that it is too late. Today's tens of billions will soon become hundreds of billions and in the end Detroit will simply wither away from a lack of sales. Some already believe the nicest thing America can do for its auto industry is to let it die gracefully; it is simply too far out of step with the 21st century to be saved.

All this is far too complex for any useful speculation about where the great bailout, if it passes this week, will take us. If there is anything that seems reasonably certain however, it is that the official scenario of a great economic rebound starting in 2010 that will lead to Detroit promptly paying back loans is far fetched. In two or three years we are likely to be so deep in a recession that buying a new cars are the last thing on most consumers' minds.

What do you think? Leave a comment below.

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