1. Prices continue to fall
As bad economic news continues to pour in, oil prices continue to fall. Oil closed last week near $55 a barrel, but by Wednesday it had sunk below $47. There is widespread skepticism that OPEC can actually organize a multi-million barrel production cut despite a stream of statements by OPEC oil ministers that there will be a substantial cut at the Oran meeting on December 17th. The average price received for OPEC crude will soon be in the $30’s. A survey by Reuters suggests that during November OPEC was able to cut about a million b/d of the scheduled 1.5 million b/d reduction.
With gasoline in the US now selling for an average of only $1.80 per gallon, oil consumption in the US was up slightly to 19.6 million b/d. US consumption appears to be stabilizing at a level about 6 percent lower than last year.
The US stocks report shows crude inventories above average, product inventories low and refineries operating at only 84 percent of capacity. There is widespread speculation that oil will continue to fall until OPEC actually makes additional production cuts.
2. Bailing out Detroit
The fate of the US automobile industry continues as the top energy-related story of the week. Unexpectedly low sales figures for November, coupled with an admission by GM that they will be out of operating cash by the end of December, make the situation dire. GM is asking for $4 billion to stay afloat until the end of the year.
In return for federal loans and guarantees that now have increased to $34 billion, the manufacturers will close factories, lay off tens of thousands of workers, and eliminate model lines.
Outcomes to this situation are all over the map. Detroit, with the help of its unions and friendly legislators, is vigorously waving the “great depression” flag, claiming that the American economy will be finished unless GM gets $4 billion and Chrysler $9 billion by the end of the month. They reject reorganization under bankruptcy, even the “prepackaged” version, as unworkable, suggesting that it is just a way for Wall Street and law firms to earn fat fees.
Many in Congress are skeptical that Detroit can turn itself around. GM will lose $20 billion in 2008 and all of the restructuring plans carry the implicit assumption that the economy will get better in a year or two, leading to a rebound in car sales.
The congressional leadership, the incoming administration and the White House all agree that something needs to be done, but differ on where the money should come from. The Democrats seem to favor taking it from the $700 billion already voted to aid the financial industry while the White House wants to use the $25 billion slated for retooling the industry to build smaller cars.
There is now general agreement that Detroit is in such bad condition that something will have to be done before the new Congress and administration takes office. The CEO’s of the big three will testify before Congress on December 4th and 5th, and votes are scheduled for next week.
