The automobile industry and the governments which love it are all living in a fools’ paradise.

Just like Romeo and Juliette.

 – The fuel for cars of the future – like five years from now – will not be available. The current crisis has its basis in the fact that dollar for dollar, the availability of petroleum fuel peaked (Peak Oil) in 1998. The US has been on the down slope of petroleum availability for ten years. In a deflationary context – that is, higher value of currency measured against most goods – oil is currently over 500% higher than it was in 1998-99: $66 against $12. This increase in cost matters a great deal.

 – The developed world’s economic infrastructure was developed upon assumed energy inputs costing less than $20 per barrel for oil … in perpetuity.  

  – Like ALL modern industrial production, auto manufacture is energy expensive. Energy is embedded in every link of every product’s supply chain. The increased energy costs of manufacturing cars has destroyed industry profits, even as other costs have declined or remained flat. This is why the auto industry is failing. Eventually, even low- wage countries will not be able to afford the total input costs of manufacturing cars; that is, labor, plus capital plus energy. Only hand- built and craft- built cars will be made, for emergency services, some businesses and millionaires. Here, the energy component will be replaced with skilled human labor and the fnial price of the product will not matter.

 – Private automobiles will join private aircraft as unaffordable toys. There wil fewer and fewer cars, most claimed by careless driving and the remainder by increasing unaffordability of fuel. 

 – The auto- centric ‘American Way of Life’ is also dependent on extremely cheap fuel. The costs of sprawl and its services: utilities, maintenance, personnel, management and financing are unaffordable when added to $50 oil. Sprawl- related growth costs are a primary reason for municipal and state budget woes. The auto industry has successfully put its support structure out of business by efficiently depleting the natural capital upon which it most depends!

 – Depletion of energy sources provided the incentive to replace energy costly manufacturing with financial services and high factory wages with bank credit. Business bought some time by sending US jobs to Mexico and China since high wages plus high energy cost meant business failure. However, the lower domestic wages and excess credit could not permanently support the asset inflation necessary to continue funding the experiment.

 – This auto manufacturing crisis is the tip of the iceberg. The demand for fuel will effect food prices – and has done so already. Higher food prices will be compounded by shortages since food is grown with and by petroleum and shipped in trucks which run on petroleum. This will be annoying in the US and other developed countries but catastrophic in the 3d world. Continued auto consumption is more and more becoming an ethical issue. Do we have food for humans or food for cars?

 – What happens between the Treasury, the German, Belgian, UK and other governments, the labor unions, the other automakers and Chrysler and GM is irrelevant. Lending cannot make cars or the fuel costs that are a part of production more affordable, it can only stretch out costs. Previous attempts by the industry to finance its way to affordability have failed alongside similar efforts to finance increasingly expensive houses. At the same time, the financing attempt succeeded in destabilizing the credit system.

The auto industry is finished. Time to pull the plug and start using our natural capital more responsibly.

Market Call: short 10 yr- 30 yr Treasuries and long oil.