$100 Oil: The Impact on Auto Makers
While Standard & Poor's is not forecasting triple-digit oil prices, the much-discussed prospect of $100 per barrel crude oil and the resulting increase in the cost per gallon of gasoline could only be considered a serious negative for U.S.-based auto makers and their suppliers. And this is clearly an industry that has already had its share of bad news.
|Streaming audio replay expires Thursday, August 24, 2006|
|Listen to a replay of S&P Ratings' July 27 teleconference on the economic impact of increased oil prices, both on the broader economy and on key sectors such as energy, transportation, automotive, chemical, and retail.|
|Conference ID#: 9634559|
If oil does in fact reach that price, a number of the negative trends that have already been very detrimental to credit quality would be exacerbated. Even before gas prices really began to rise, auto makers had already begun to shift their product mix away from large, very profitable SUVs last year. The impact of this shift has been extremely negative for the credit profiles of Ford (F) and General Motors (GM) and an important contributor to the downgrades over the last year.
For the first six months of 2006, SUV sales were down 13.9%, year over year, while sales of passenger cars were up 2.4%. Crossover utility vehicles, a growing segment but likely less profitable than large SUVs, represented the majority of the combined SUV-CUV segment for the six months ended June 30, 2006, a marked reversal from the first half of 2005.
And there are now signs that the full-size pick-up truck market, which we view as the last remaining segment of SUV-like profitability for domestic auto makers, could be softening as the discretionary buyer weighs his purchases in light of current gas prices. Full-size pick-ups were down 11.2% for the first six months of 2006.
With all of these negative events occurring even without $100 oil, it's clear that if such a milestone is reached, it would add a much sharper point, and perhaps faster pace, to these challenges.
There could also be a completely new incremental negative arising from $100 oil, namely a drop in aggregate industry demand, if the consumer economy were to weaken. For example, our economists currently forecast U.S. light vehicle sales at 16.5 million for 2007 but believe that in a $100 oil scenario, U.S. light vehicle sales could drop to around 15.2 million, a decline of about 8% from the 2007 base case.
While GM and Ford continue to lose market share, industry sales have remained broadly favorable in 2006, as they have for the past several years. U.S. light vehicle sales in the first six months of 2006 were down 2.4% over the same period in 2005 and we continue to expect full-year 2006 sales to be slightly below 2005, though still at historically robust levels, in the range of less than 3% below the 2000 peak.
So $100 oil could certainly have the serious potential to reintroduce the sort of downward sales volatility that has periodically characterized the industry. And a real drop in industry sales volumes would hurt all auto makers.
But the negative impact on the credit profiles of Ford and GM of significantly lower industry demand, occurring on top of the adverse mix shifts of recent years, and arriving right in the midst of their extensive turnaround efforts—including efforts to reduce heavy incentives—would be the worst of the fallout from higher for oil prices.