U.S. automakers betting on higher oil

DETROIT Thu Sep 18, 2008 9:54am EDT

Ford Motor Co. CEO Alan Mulally attends the Reuters Autos Summit in Detroit, Michigan September 15, 2008. REUTERS/Rebecca Cook

Ford Motor Co. CEO Alan Mulally attends the Reuters Autos Summit in Detroit, Michigan September 15, 2008.

Credit: Reuters/Rebecca Cook

DETROIT (Reuters) - Oil prices may have fallen back to about $100 a barrel, but few in the auto industry are ready to pop the champagne corks just yet.

The nearly $50 drop in the price of oil may help the beleaguered industry in the short term, but consumer tastes have firmly changed in recent months and the industry has changed with them, executives said this week at the Reuters Autos Summit in Detroit.

A jump in fuel prices this year prompted a sudden shift among consumers, who have largely given up gas-guzzling trucks and SUVs in favor of smaller, more fuel efficient cars.

General Motors Corp (GM.N) continues to plan its vehicle line-up and technology investments around the assumption that oil will average between $130 and $160 per barrel over the next five years.

"The reason oil has come off so significantly is because the economy is so weak," GM President and Chief Operating Officer Fritz Henderson told the Summit. "We're still better served planning for higher oil prices."

"It's going to be volatile," he said, calling the recent price swings "astonishing."

Truck demand could pick up in the short term if pump prices begin to reflect the decline in crude oil, Henderson said, and if oil prices decline significantly and consumers shift back to larger vehicles, GM has the capacity to meet that demand.

SMALL IS IN

Ford Motor Co (F.N) Chief Executive Alan Mulally said buyers moved "aggressively" into smaller vehicles once gasoline prices reached $3.40 per gallon.

But even before then, Ford decided to push for more fuel-efficient vehicles and alternative fuels because it saw a long-term mismatch between world energy demand and production capacity.

"So even if the fuel prices dropped down in the near term, we think long term they are still going to be relatively higher," Mulally said.

For automakers and their suppliers, a source of frustration is a lack of clear direction on U.S. government energy policy, since vehicles take as long as five years from initial development to the showroom.

"Which vehicle platform do I spend my precious billions on?" said Tim Leuliette, chief executive of parts maker Dura Automotive Systems. "The one for $2 gasoline or the one for $4 gasoline?"

He added that: "While Washington would like to take Detroit to task, Detroit could take Washington to task and say, 'Give me a national oil policy so I know what I'm doing here.'"

CAUTIOUS CONSUMERS

In just two months, oil prices have dropped from a July peak of $147 per barrel to about $90 this week, before rebounding to about $100 per barrel on Thursday.

What could be good news for the industry is tempered by the fact that the reason behind the decline -- faltering U.S. and global economies -- is also making consumers delay their purchases, and limiting options for buyers who rely on credit.

A short-term drop in energy costs may make little difference to consumers who are already spooked by falling home prices, much tighter credit and -- most recently -- turmoil in the stock market.

"It would take a prolonged period of low oil prices and the stabilization in housing and credit availability to get the consumer to move back to a more normal position," said Mike Jackson, chief executive of AutoNation Inc (AN.N).

Oil prices could fall below $90 a barrel, said Toyota Motor Co's (7203.T) U.S. sales chief Jim Lentz, which could help lift U.S. consumer confidence. But other factors could outweigh the good news.

"I think the loss of wealth due to declining home values is having probably the biggest negative impact on our consumers' confidence," Lentz said.

(For summit blog: summitnotebook.reuters.com/)

(For more on the Reuters Autos Summit, see <ID:nN15267022>

(Editing by Dave Zimmerman)