“Big Three” look at big losses

“It was the best of times, it was the worst of times” to use the words of Charles Dickens to describe the world today.  Perhaps these words are equally true at any time, but they seem appropriate enough today.

In the best of times category, we are seeing the long overdue death of the Hummer and the dying gasp of the SUV, those ultimate symbols of consumerism, disrespect for the environment and the resources of the earth.

The individuals who bought those gas-guzzlers have been pawns in a big marketing game.  GM, Ford and Chrysler knew a good thing by positioning the large vehicles as status symbols with big price tags and profits over $10,000 per unit.  They co-opted the American and Canadian government CAFE standards to allow large vehicles and SUV’s a pass on fuel economy.  The big three automakers are now fighting a wintertime retreat from Moscow.  They are getting massacred by Honda and Toyota among others, who have had a better strategic vision over the years.

GM’s results over the years have varied from a high of $10 Billion in 1984 to a loss of $38 billion in 2007.  In the last ten years, they’ve lost money overall.  Let’s be generous and assume an average $2 billion annual profit over the last 30 years.  That’s not a great return on sales of $200 billion. Recently, GM’s VP Bob Lutz indicated that it would cost an average of $6,000 more per vehicle to meet the new CAFE standards.  If that is the case, GM has a problem as consumers will have less disposable income for cars in the future.  Toyota indicates that it will meet the 35-mpg standards well before the required date of 2020.

The CAFE standards will soon be the least of the American automakers problems.  Higher gas prices will make the standard irrelevant, with consumers demanding vehicles giving 50 to 100 mpg, no matter what kind of silly marketing schemes Detroit comes up with.

What has been the “butterfly effect” of GM on the US and world economy? Obviously, GM is no butterfly but a recent film by the same name or the 1947 film “It’s a wonderful life” with James Stewart illustrates the concept that a relatively small action can have a great effect in the future.

One can only wonder what would be the alternate future if GM had embraced fuel efficiency for both small and large vehicles (SUV’s).  Supposing that the world gas usage (including US) was 2 million or 5 million barrels a day less than it is today.  This would have been a real possibility.  Supply would be greater than demand and the price would still be at $55 per barrel or less.  The world’s oil bill would be $2,300 billion less in 2008 (86 MBarrels *365 day* $75/b difference).  These are large sums by anyone’s standards as the Canadian federal budget is $550 billion per year.  This is equivalent to the entire cost of the Iraq war until 2017.  GM, in turn, would be profitable today.

I see the big three automakers headed towards bankruptcy in the next few years.  GM is burning through cash at a rate that precludes significant changes to their products and cost structures that would be required. Are GM and the others too important to be allowed to fail?  Will the public be interested in a bailout of this size?

Rick Wagoner, CEO of GM, seems to understand that the oil prices are not coming down but does he really understand the implications of peak oil in his bones?  Can someone who earns $15 million a year not fully understand the fuel supply that his products run on?

GM has some new products in development, one being the Volt, an electric car.  The car will cost $40,000 and run 40 km before the backup engine kicks in.  At that price, it is not initially intended as a high volume contender.

This column has mentioned the lack of consumer choice in vehicles that have good mileage ratings and that are available elsewhere.   A car dealer would say that they don’t meet the North American standards, but that sounds like thinly veiled labour protectionism as the climate / emission / safety standards in Europe should be capable of harmonization to North America.  The cars work perfectly well in Europe.

“There are 113 off-shore models (mostly Europe) that get over 48 miles per imperial gallon in a combined rating,” according to an article by MSNBC earlier this year.  The fact that very few are available here is an admission of failure by our government to foresee and manage the liquid fuel crisis.

The big three automakers and labour unions are managing government policy and Canadians are now paying a significant premium for that dubious privilege.  Where are all of the free market pundits when you need one?

I haven’t heard them saying that a little more competition would shape up GM and the others?  Isn’t that their mantra?

What’s in your future as oil prices rise?

The ancient city of Pompeii was destroyed by the volcano Vesuvius in 79AD and the majority escaped.  But 3300 people died during the 24-hour eruption, even though there was ample time to flee.  Similarly, we see people staying in the path of hurricanes and dying.  Humans often fail to appreciate a dangerous situation, make a poor decision and perish.  Explaining some of the dangers that exist in our energy supply may help people make better decisions on their future.

About two years ago, my first columns looked at peak oil and the gradual decline of oil production that would be coming soon.  A shortage would raise prices dramatically and affect our ability to buy gas for our cars, heat our homes and have a job.  It’s not exactly the same urgency of Pompeii, but quite serious.  The author Jim Kunstler calls it “the long emergency”.

I remember discussing peak oil with the management of Saint John Energy.  Their response was similar to the average man in the street – denial, belief that more oil will be found, or that human ingenuity (technical solution) would conquer the problem.

Today peak oil is sending a few tremors through the economic system and while more people are aware, the majority are not. Many people sense we’re in trouble but haven’t connected the dots. I’m going out on a limb and make a few more predictions for the coming years. There is a range of outcomes, based on our response to the problem, which goes from bad to horrible.  If you don’t want to know, please turn the page and have a good life.

1) While we may see a short-term decline in price in 2008, the overall tendency will be prices rising to unbelievable levels within several years.  The price of oil has doubled as worldwide production capacity has virtually stalled.   A decline of capacity will soon start and perhaps be at 50% of present day levels by 2030 or by 2040 if we’re lucky.  Either way, it’s bad news.  Note that an oil decline of 1% equals a 1% decline in GDP.  You lose your oil and your economy contracts.

2) The price of food will rise significantly over the world on a continual basis.  The productivity of farmers (the green revolution) was related to its major inputs, which are oil and fertilizer.  With a decline in oil and fertilizer, we can expect food shortages and significant starvation related deaths in the next twenty years – Not necessarily in Canada as we have the means to avoid being priced out of the food market. Can the present industrial agriculture model be maintained without enough oil for farmers or transportation of that food to distant lands?

Based on the exhaustion of the resource base of our planet, whether it is fish, steel, coal, oil, or other commodities, it seems evident that the long-term carrying capacity of the earth is less than the present world population of 6.6 billion people.  The exact figure is a matter of some debate.  The expected shortage of food will kill billions of people.

3) The airline industry is in serious trouble.  The problem has long term roots in high cost fuel and it is not going away.  Worldwide, airlines expect to lose somewhere between $2.6 and $6 billion dollars in the current year.  Subsequent years will provide further grief with rising ticket prices, lower passenger volume, contracting schedules and bankruptcies throughout the industry. In the long term, perhaps beyond 2015 or 2020, air travel will be available only for the wealthy, government, military, and specialized high value cargo.  There may be a return to nationally owned carriers for small countries who don’t want to be totally isolated when commercial carriers go under.

IATA chief executive officer Giovanni Bisignani notes. “Skyrocketing oil prices are changing everything. The situation is desperate and potentially more destructive than our recent battles with all the horsemen of the apocalypse combined.”

The airline industry misery will spillover to the manufacturers of airplanes, like Airbus and Boeing, as orders are cancelled.  The airlines will need the more fuel-efficient planes but won’t be able to afford to purchase them.

4) The North American auto industry has hit a large pothole and is out of alignment.   GM announces closure of several auto plants featuring large vehicles virtually admitting that peak oil has arrived.  In the short term, people will be scrambling to find cars with the best mileage they can.  GM, Ford, and Chrysler will re-organize to provide cars with better mileage.  They may go bankrupt within several years.

Unfortunately, the best mileage cars are sold in Europe, not Canada.  For example, the Ford Focus diesel gets an average rating of 59 miles per gallon in Australia, the Philippines, Thailand and Europe but not Canada.  Isn’t that strange?

But enough predictions for today.  It’s too depressing.  The geologists and thinkers who believe that energy scarcity will dominate the agenda for the next 100 years were right on target while all of the government agencies and oil companies predicting no problems for the next 50 years had their heads in the sand.  It seems to be difficult politically to admit that oil is a huge problem and we’ve built a society based on a fuel that is disappearing.

Is there hope that we might see our three levels of government take control of the Titanic and change course?  The fog has lifted and the iceberg is before us.  There are things we could do.

Will carbon tax get more New Brunswickers off oil?

Do you think this is true? – “The price of oil will go down if we use significantly less of it.” The law of supply and demand indicates that if supply is relatively fixed, then demand will determine whether price goes up or down. So how are we going to use less? Maybe all of your neighbours will buy a hybrid or a diesel car and you won’t have to change a thing in your life.

Perhaps we can wait for the market to give us even higher prices and then we will conserve. That’s the philosophy of our energy minister Jack Keir and he’s not entirely wrong. However, in a case of inelastic demand and fixed supply or worse, then the market will raise prices until demand is destroyed. A friend told me that even when it costs $300, he’s going to fill his gas tank. Naturally, those who have the means will be able to maintain their lifestyle. The price of gas has almost doubled in the past year but how many people have really changed their driving habits to conserve?

The market can be rough on fishermen, farmers, and truckers who use large quantities of fuel and who sometimes get squeezed between rising fuel and low prices for their products. We can expect to hear screaming from those sectors in the near future. Unfortunately, the average Jack and Jill will have to make unpleasant choices in the near future, and that may include parking the car.

With the recent increase in gas prices, Canadians are feeling a little economic stress. We’re paying $55 billion more per year (or $1700 more per capita) for oil based products since last year. That means less money for consumers to spend on restaurants, vacations and other discretionary items.

Historically, the price of carbon based energy has been cheap and has been taxed at a low rate in North America. Economists argue that the market price for fossil fuels doesn’t account for external factors such as pollution and CO2 gases. Carbon taxes are intended to rebalance the business equation – to add a penalty for pollution, discourage greenhouse gases, make renewable energy more competitive, and also encourages conservation of fuel.

What would be the impact of a carbon tax and is it necessary?

British Columbia is the first in North America with a comprehensive consumer based policy, starting with a 2.4 cent increase at the pumps and $10 per tonne of CO2. These amounts will gradually increase until 2012 at which time the gas tax will be 7.2 cents and the CO2 will be $30 per tonne. The tax is revenue neutral although the provincial budget has increased expenditures to reduce the effect of climate change. The cost to the consumer at the gas pumps is expected to vary between $20 and $65 dollars per year based on vehicle efficiency.

The BC legislation increases the cost of gas only 2% initially with a total of 5% when fully implemented in 2012. The Green Party suggests a more aggressive 12-cent hike as their policy. To put this into perspective, a 10-cent increase in the cost of diesel happened in mid May in New Brunswick. After a few days of discontent, it was back to business as usual for most people.

Quebec introduced a carbon tax in 2007 on oil and gas companies at the wholesale level to finance a green fund to reduce CO2 emissions. As the majority of electric power in Quebec is from hydropower, there is little effect on electric prices.

Carbon taxes have existing in Finland and Sweden since the early 90’s and those economies are doing well. It has been demonstrated by the European example that higher fuel prices help people choose vehicles that have excellent mileage. Fuel including taxes in Europe are about $2.10 a liter as opposed to $1.32 in Canada.

The BC Liberals, federal Liberal, or Green Party have implemented or propose systems that are revenue neutral (easier to sell). This means that for every $100 in new tax, $100 is returned to Canadians in reduced personal, corporate tax, or other method. Prime Minister Stephen Harper seems to skip over the revenue neutral part and paints a carbon policy as a tax grab. His approach to reducing emissions has been to build a regulatory environment so complex and mysterious that greenhouse gases will give up out of frustration – far in the future, of course. The NDP is opposed to a carbon tax and favours the cap and trade model. Ontario and Quebec just announced a plan to implement a cap and trade system for their two provinces, which was immediately denounced by the federal minister, John Baird.

So we have ideas floating all over the map. Perhaps we need have a reasoned discourse on the subject of greenhouse gases and peak oil and determine what we need to do to be effective. Taxes at the right level are only a small part of the solution. I like the simplicity of a carbon tax and believe that as proposed, it is harmless to the economy but won’t do much for peak oil as well. “Much ado about nothing” as Shakespeare would say.

We haven’t seen the last of the energy file. Next stop will be panic driven interventions in energy conservation and off-oil efforts. Fatih Birol, chief economist of the International Energy Agency urgently recommends to the world “leave oil before it leaves us. The really important thing is that even though we are not yet running out of oil, we are running out of time.”

Do you think we’ll be ready?

On Big Issues, Graham’s Government has earned a ‘D’

Does it bother you trying to compare the real price of an airline ticket or vacation? Taxes or fees can more than double the first price you see.

One of the best I’ve seen recently was a car dealer who sent a card to my residence and thousands of others. It appeared that I had won $1000. I turfed the card as being a gimmick, but a friend took the bait and his “win” was a fishing rod which, bought in bulk from China, probably cost $5. The fine print showed 56,000 fishing rods and one $1000 prize. It seemed to be working for them based on the volume of people at the dealership. You can’t sell to a customer until they show interest or step through the door.

Governments do marketing (sometimes called spin) over a long period, which culminates on Election Day. They’re selling a brand, a dream for a better tomorrow because there is little they can do to change today. They have to convince you that they care for you, that they are good stewards of your money and that you are better off if you vote for them again.

Given the short memory of most people, politicians only give you a break in the last 12-18 months before an election. In the first two or three years of a mandate, you often get to feel the cattle prod. Usually, there is a time lag between a change in policy and when the public perceives an actual change. Has there been too much haste to achieve concrete results before the next campaign starts, probably in 2009. Has the thought process on policy been overlooked?

If Shawn and the Grahamites were a band trying to make a name for themselves, some of their tunes would be the “self-sufficiency reel”, the “UNBSJ breakdown” or a recent cut called “French Immersion –the late waltz”. Is this the best that we can get?

Changes to public policy should start from a clearly defined problem and evaluate a series of solutions, which are weighed from many different angles – in other words, a serious business case. What was the clearly defined problem that required the removal of UNBSJ and the solution of a polytechnic?

What is the definition of self-sufficiency for tomorrow’s world of global warming and energy scarcity? What are the concrete steps that will start the process and how will it work. We were invited to participate in a dream of self-sufficiency that we might all have contributed to and believed in. But it collapsed due to a lack of intellectual clarity at the start and poor execution.

The Early French Immersion review identified a real problem but picked an inferior solution. Was there no time for negotiation and finding a middle ground? To achieve a September 2008 implementation takes time to organize apparently.

There are some bright spots. The government has accelerated the creation of wind power facilities and this should reduce our dependence on oil fired generation to some degree. They are investigating a second Lepreau, which has some positives and of course negative aspects.

As much as I disagree on some of the approaches of this administration, what this government seems to lack is the ability to listen and it is failing to act on the incredible danger to us all from peak oil. Listening to Jack Keir recently, he appears to understand some of the dimensions of the problem. He has unfortunately failed to produce an energy policy and specific approaches that could ease our way into the post-carbon era.

The era of continual growth fuelled by oil is coming to an end. Should Shawn Graham be asking Stephen Harper for $137 million to twin 55 km of Route 1? Let’s evaluate two different ways this money could be invested.

1) Spend on twinning Route 1 – No additional revenue is evident once the road is built but some additional maintenance costs are required for snowplowing and expensive repaving at 10-15 year intervals. No payback from this project. In fact, it is a drain on resources.

2) Provide a $2,500 subsidy for any New Brunswicker’s who upgrades to a fuel-efficient car – Let’s say over 40 mile per gallon. The $137 million would fund 55,000 cars spread over a number of years. Each vehicle would burn 1300 liters less fuel a year than the previously owned gas-guzzler. At $1.50 a liter, which it may be quite soon, it would save $1,950 per car per year. At its maximum impact, the money back into the pockets of our citizens would be $107 million per year. This money is no longer going offshore to Saudi Arabia but staying in our pockets to spend locally. The payback could be as little as 1.5 years.

I won’t go into program details because there are many ways that this program could be designed. Is 40 miles per gallon an aggressive enough target? Would Buzz Hargrove of the Canadian AutoWorkers approve of this idea? Of course not. GM mostly sells gas guzzlers. What the example shows is there are ways to slow down the effect of high oil prices and produce less CO2.

The Liberal government has shown some courage in addressing certain issues and for that reason, I would give them a D on overall performance instead of an F.

Could the government be more creative and effective? Yes, very easily.