Oil Prices, Profits Hit Record Highs, Threatening U.S. Auto Jobs
Detroit's Corporate Management Bet the Ranch on Gas Guzzlers, but Soaring Pump Prices Have Sent Profitable Truck Sales into Tailspin
WASHINGTON, DC (July 29, 2004) - Yesterday oil futures hit a 21-year high of $43 a barrel on the New York Mercantile Exchange. Today ExxonMobil reported a record second quarter profits of $5.8 billion, 39 percent higher than last year. Royal Dutch/Shell announced a 54 percent rise in profits, while ConocoPhillips reported a whopping 75 percent growth in second quarter bottom line.
That may be cause for celebration in oil company boardrooms. But it is bad news for U.S. consumers, and an increasingly serious problem for American men and women in high-wage auto manufacturing jobs.
Since oil prices first spiked this spring, sales of Detroit's biggest, most profitable vehicles have taken a nosedive, leaving manufacturers with an unprecedented backlog of unsold pickups and SUVs gathering dust on dealer lots, just at the new model year is about to begin. Companies are spending $5,000 in incentives and giveaways on many once-profitable models.
The reason is soaring worldwide demand for oil, coupled with rising instability in the Middle East and other important oil-producing regions. Oil imports account for 55 percent of America's growing oil demand. With just three percent of the world's oil reserves -- versus 65 percent in the Persian Gulf -- oil dependence represents a permanent challenge that cannot be solved by drilling at home. (For more information, click here.)
Excessive oil dependence makes us extremely vulnerable to oil market volatility, whether it is driven by fear of terrorist attacks in the Middle East, political upheaval in Russia, or corruption in Nigeria.
Bad News for Business, Workers
Despite ample warning, U.S. auto industry managers have been caught with their pants down. According to J.D. Power & Associates, as of the end of June the industry had a staggering 3.5 million unsold vehicles, 570,000 more than usual and a record for that month. Ford and GM will be shuttering factories this summer, idling more workers than in years past.
General Motors alone has close to one million unsold trucks on hand according to analyst reports released this week by Goldman Sachs and Lehman Brothers. Both firms predicted deep production cuts in the light truck segment on which U.S. auto companies depend for much of their earnings.
"We believe that GM's inventory will be flashing 'danger' by year-end; that is, unless the company elects to lower planned production hard in the fourth quarter and/or runs a massive, and costly, inventory clearance sale," said the Goldman Sachs report.
Already this month, Ford has extended the normal summer shutdown at five truck assembly plants. GM is extending the seasonal closure of plants in Tennessee and Georgia.
Japanese competitors, who have invested more in energy efficient technologies, are gaining market share at the expense of American manufacturers. Asian carmakers boosted their June market share nearly 10 percent over last year. Toyota passed Ford to become the number two auto company in the world last year, earning more than twice the net profits of its nearest competitor.
Time for a Change
According to the International Energy Agency, oil demand this year has grown by 2.3 million barrels a day, about three percent, the fastest growth in almost 25 years. At the same time, spare production capacity is at the lowest level since the 1970s oil shocks.
The cars, SUVs, minivans, and pickup trucks on the road today use far more oil than they have to, chaining American drivers, our economy and even our foreign policy, to oil. Despite improved technology, fuel economy is lower today than in the mid-1980s. Cars, SUVs and other light trucks consume 8 million barrels of oil every day.
U.S. oil consumption rose 15 percent between 1990 and 1999. Total U.S. oil consumption was 17 million barrels per day in 1990 and more than 19.5 million barrels per day in 2000. During that same period, American oil imports rose 40 percent. If current trends continue, in twenty years 70 percent of America's oil will be imported.
The United States spends nearly $200,000 per minute overseas to buy foreign oil, much of it from parts of the world where it is controlled by unstable or less-than-friendly governments.
America needs a responsible energy policy for the 21st century that drives down our oil dependence, generates good jobs at home, and protects the global environment. (For more information, see NRDC's reports, Dangerous Addiction and A Responsible Energy Policy for the 21st Century)