Keller

In the last month, crude oil prices soared to near $50 a barrel and then dropped from that level. There are pundits on both sides of the debate as to the causes of the run up and whether the current prices will increase from here or retreat back to the $30 a barrel range. But there are too many uncertainties for anyone to claim that they have all of the answers about the direction and magnitude of near term energy price changes. And no one is suggesting that we are going to return to the crude oil prices of a decade ago. Commodity speculation aside, the emergence of China and India as major energy consumers puts a new and higher floor under future crude oil prices.

Unlike the energy crisis of 1974-1975, which was the result of an embargo, the current energy situation has its roots in surging worldwide demand. The world has reached the point where we consume every barrel of oil that can be produced.

Our appetite for gasoline is soaring as we add vehicles to the population, favor less fuel-efficient trucks over traditional passenger cars and equip vehicles with energy consuming features like all-wheel drive. Detroit is essentially out of the passenger car business with the exception of fleets and its total dependence of light truck profits is scary.

Without the abnormal profits of gigantic SUVs, high incentives and rising interest rates, this industry could find its profits further compressed. Squeezing parts suppliers for concessions or rushing off to China to source components won’t solve Detroit’s problems. Cheap parts, which any auto company could buy from China do not confer any competitive advantage while the product line and manufacturing flexibility of the Japanese does. Even as Nissan, Toyota and others add huge SUVs to their lineups, they also continue to hold their share of the passenger car market.

Who is to blame for the skewed dependence of Detroit in huge trucks? It’s too simplistic to say car buyers like big trucks, horsepower and plenty of gas guzzling features. It is true that people take their cues from what they see and experience in daily life. If gasoline is cheap, they consume it.

Our cavalier attitude about gasoline begins with politics. For starters, Congress and every president from Reagan through Bush deserve blame for energy policies that encouraged consumption. How else can anyone look back at twenty plus years of minimal changes in CAFE, no increases in fuel taxes and, most recently, tax credits for the purchase of 8,500 pound “passenger” vehicles? CAFE is a flawed system for controlling fuel consumption but it was all we had since Congress and various Presidents lacked the backbone to impose gasoline taxes.

Gradually, the spirit of the law gave way to products that fit through loopholes in the law. The writers of CAFE never imagined an 8,500- pound vehicle in a family garage, multi-fuel credits and cars that were labeled trucks. At the very least, Congress could have closed these loopholes but no one saw any personal benefit in leading that charge.

The auto industry shares the blame because it lobbied hard to insure that there were limitations on giant trucks or mandated investment in technology to improve fuel economy. Managements wasted billions of dollars buying back their shares (a bad investment given where their shares are trading now), investing in internet ventures or acquiring and pouring more money into moneylosing niche auto companies. Most of these were bad business decisions made while Detroit argued that it had little in the corporate coffers to spend on fuel conservation. Investments in China were justified on that country’s soaring car demand. But no one connected the dots between surging car demand in China and the need to be prepared for higher crude oil prices.

As a member of two National Academy of Sciences panels researching CAFE and fuel economy I can personally attest to the smug and often arrogant testimony from auto industry economists and the industry’s hired hands. We were told that consumers didn’t care about fuel economy, that bigger vehicles were safer and that technology to improve fuel economy, didn’t pay for itself. Detroit always had the numbers to justify not investing in fuel economy even as managements convinced themselves of big paydays from share buybacks, Fiat, the Internet, JoeAuto.com and owning dealerships and salvage yards … to name just a few. The billions flushed down a hole on these new age distractions could have vaulted Detroit into technological leadership in the industry. Yet in 2004 it finds itself coming up short on engine technology and a product line that is dependent on cheap gasoline.

I often asked what would happen to Detroit’s finances if the customers no longer wanted big trucks, not because of regulation but because of fuel prices? Was this a risk that should be factored into their long term planning even if CAFE were unchanged? The answers were always comforting rhetoric that revolved around cheap fuel forever.

Detroit desperately needs to accelerate its corporate restructuring at all levels along with investment in technology to regain leadership in all areas of emissions, safety and fuel economy. We know that this year and in 2005 vehicle demand won’t rise above 17.5 million because the economy isn’t creating enough high paying jobs or fostering personal income growth to support more car demand. We also know that consumers are carrying massive debt that they cannot continue to spend as they have for the last decade. Fewer can afford giant SUVs and fewer still will want to feed their thirst for gasoline. So where is the money going to come from to pay for future products and invest in technology? Surely not China!

Maryann Keller is a veteran auto industry analyst and author of the books “Rude Awakening: The Rise, Fall and Struggle to Recover at General Motors” and “Collision: GM, Toyota and Volkswagen and the Race to Own the 21st Century.”