More bad news from the U.S. auto industry (Both Ford and GM ...):
Both General Motors and Ford said Wednesday they would scale back production in the second quarter, a move that reflects their falling sales and shrinking market share in the United States.
Check out the graphic (i.e., click on the thumbnail), all of the other automakers gain sales in February while GM and Ford lost.
And the wounds continue to be self-inflicted:
Much of General Motors' revival rests upon its new line of large S.U.V.'s and pickup trucks.
Is this the business equivalent of banging your head against the wall to get rid of a migraine? Do they think that gas prices will fall back to Feb 2005 levels?
It is well known around here that people don't cut back much on gas consumption when prices rise. We call this an inelastic demand. My current rule of thumb is that the short run elasticity of demand is about .1 and the long run elasticity is about .5. This means a 50% increase in gas prices leads to a 5% decrease in consumption in the short run and a 25% decrease in consumption in the long run.
But why is gasoline consumption so unresponsive to prices? A common theme is that we are ugly, gas guzzling americans who simply like to drive too much. This isn't really so. Our gasoline demand is locked in for two long run reasons. First, we buy cars and hope to keep them for 5 to 10 years. If the car is a gas guzzler we tend to still want to hang onto it until it wears out a bit. Then, if gas prices are still high, we might look into buying something more fuel efficient.
Second, we buy houses which dictates how far we drive to work. If gas prices rises, people don't move closer to work, at least not until they experience very high gas prices for a very long time.
So, I think, our gas consumption decisions are tightly constrained in the short and the long run. But when does the long run start? How about, um, maybe, now? We've experienced significantly higher gas prices for 6 months and there doesn't seem to be much evidence that they will fall back to pre-Iraq and pre-Katrina anytime soon. So, I'm guessing that now is a good time to buy a smaller car when the SUV wears out.
But GM and Ford don't think so ...
Update: Exxon thinks prices will stay high too. From the WSJ's Afternoon Report:
In a possible sign that it expects high oil prices to stick around for a while, Exxon Mobil said it planned to lift its annual spending on exploration and other capital projects to $20 billion between 2007 and 2010, from a current level of $18 billion. Though oil prices have been in the stratosphere for months, major oil companies have been reluctant to spend much money to expand production capacity, remembering the painful lesson of the 1980s, when they reacted to the high oil prices of the 1970s by building up a glut of capacity, which in turn led to a long period of very low oil prices. Chevron, the No. 2 U.S. oil producer after Exxon, yesterday announced its own plans to lift production capacity, just days after it said it planned to develop a costly oil-sands project in Canada
