GM Drops the V8; WSJ on $100 Oil

GM Drops the V8

This is pretty significant in my opinion:

GM Drops V-8 Engine on Rising Fuel Prices, Regulation

Jan. 3 (Bloomberg) — General Motors Corp., the world’s largest automaker, canceled a $300 million program to build an advanced V-8 engine for luxury vehicles, citing rising oil prices and tighter U.S. fuel economy restrictions.

“We have seen a declining demand for V-8 engines as fuel prices have risen,” GM spokeswoman Sharon Basel said today. New requirements for carmakers to boost average mileage 40 percent by 2020 also figured in the decision, she said.

GM is trying to shed its reputation for gas-guzzling vehicles as it loses sales to Toyota Motor Corp. and its fuel- sipping Prius, a gasoline-electric hybrid. Eight-cylinder engines, used mainly for high-performance sedans, large pickup trucks and sport-utility vehicles, get lower mileage than conventional four- and six-cylinder engines.

“That’s maybe the first volley in what’s starting to look like this brave new world,” said Jack Nerad, executive industry analyst for Irvine, California-based Kelley Blue Book, in an interview today. “Perhaps they looked at the implications of the new energy bill that just passed and saw the writing on the wall.”

So, something positive has already come out of the new CAFE regulations. Definitely a step in the right direction.

WSJ on $100 Oil

One of the things that is often unmentioned when we discuss current oil prices is the giant transfer of wealth from the U.S. to a lot of countries that dislike the U.S. The Wall Street Journal reported on this today:

Oil Hits $100, Jolting Markets

The surging price of oil, from just over $10 a barrel a decade ago to $100 yesterday, is altering the wealth and influence of nations and industries around the world.

The long oil-price boom is posing wrenching challenges for the world’s poorest nations, while enriching and emboldening producers in the Middle East, Russia and Venezuela. Their increasing muscle has a flip side: a decline of U.S. clout in many parts of the world.

The article is pretty long, but one section is devoted to this transfer of wealth:

Oil’s run-up is bringing the most startling changes of all to the Middle East. Big producers like Saudi Arabia and the United Arab Emirates are using their billions in profits to build their economies with roads, schools, airports and entire new cities. The value of hydrocarbon exports from the Middle East and Central Asia is expected to approach $750 billion this year, almost four times the level in 2001, according to the International Monetary Fund.

Underscoring the region’s new global financial heft, Abu Dhabi recently swooped to the rescue of Citigroup Inc. with a $7.5 billion cash infusion as it struggled with write-downs from this year’s credit crisis.

Even before that deal, Bahrain, Kuwait, Oman, Saudi Arabia, Qatar and the United Arab Emirates, which includes Abu Dhabi, spent about $124.3 billion in the past three years buying up foreign companies, real estate and other assets, according to London-based Dealogic. One transaction underscores the region’s financial-markets ambitions. Dubai, also part of the UAE, agreed to a complex deal with Nasdaq Stock Market Inc. that essentially gives Dubai major stakes in Nasdaq, the London Stock Exchange and Nordic exchange OMX AB.

This wave of oil wealth is blunting America’s influence. Oil money has galvanized the might of Russia under President Vladimir Putin. He has overseen a dramatic consolidation of power and rollback of democracy in Moscow, while sticking a thumb in the West’s eye on issues ranging from independence for Kosovo to the U.S. bid to build an anti-Iran missile-defense system in Europe.

Surging oil prices have also weakened the Bush administration’s efforts to use financial pressure to get Iran to back off its nuclear program. China, eager to secure all possible access to energy, increasingly is turning to Iran as a trading partner, with oil going east and Chinese technology heading the other way. High oil revenue, meanwhile, has kept the otherwise rickety Iranian economy humming and Iran’s current government firmly in power.

In closing, the size of ExxonMobil is put into perspective:

More than from their bank accounts, national oil companies’ strength stems from their control of resources. Exxon Mobil, with a market capitalization of around $500 billion, is one of the largest and most successful publicly traded companies ever. But there are 12 state-controlled oil companies, such as Saudi Aramco and PetroChina Co., that control more oil reserves.

The article is a good read. I have quoted less than 20% of it. Our political leaders need to sit up and take notice.

26 thoughts on “GM Drops the V8; WSJ on $100 Oil”

  1. Re the impact of oil prices on the global economy and the US position in it — it is worth keeping in mind the enormous scale of international trade.

    From some recent US government figures — total imports by the US Jan – Oct 2007 were $1,925 Billion. (Yes, that is almost $2 Trillion, for less than the whole year).

    Petroleum’s share of those imports was $260 Billion. A huge amount, for sure, but 85% of US imports are NOT oil.

    The financial aspect of the international oil trade is not an insoluble problem. The US could easily offset the higher dollar cost of oil imports by simply importing fewer BMWs and Airbuses.

    The physical aspect of the trade is more worrying — and not just of the US. Remember, the EU imports more fossil fuels than the US, and Russia is the only major economy which is energy self-sufficient.

    On the other side, we should also remember that most of the major oil exporters have to import food. They need to trade just as much as the oil importers.

  2. That WSJ article was good, and the interactive graphics even better. Wish there was a way to save it to my computer.

    About the “GM drops V-8”, I’m not that shure it has to do with the CAFE regulations. GM is in deep trouble, losing market share to Toyota and others every year. That decision, I feel, has more to do with cost-cutting measures. They have the nearly as powerful V6, the current Northstar V8 (destined to be phased-out in 2012?) and the old small-block V8’s, all good engines (although not that fuel efficient) that they could re-develop and keep alive. Their smartest move would be IMHO to buy existing, working and proved technology from Europe or Japan. Maybe a nice 1.6L inline four that does 40mpg already.

    But it IS an interesting future for the automakers. If the ICE is going to have any future at all it better be in small, light cars with a minimum of electric accessories. As (and if it does) battery technology evolves significantly, one might see the more luxurous cars being all-electric and the cheap, economy cars being ICE ones. With the oil prices and the environmental debate this is about to unfold in just 10 years. Will be fun to watch!

    Meanwhile, I’m keeping my 42 year old biodiesel Mercedes on the road. It does after all get around with 30mpg.

  3. Buried in this piece on Japanese efficiency I mumbled a bit on our American self-image as oil producers.

    I think this is key and explains our slow reaction to dollars running to bad actors.

    I don’t have a good graph, but we were the largest producer of oil for many years, right? And out drop out of the top 3 is very recent?

    I don’t think it is surprising that our mental relation to oil lags. It takes a while for self-image to change.

    I’m not sure how low our production has to fall, or how high our imports have to rise, before we adapt the Japanese/German mindset.

  4. States producing the “devil’s excrement” generally have little else to export. Oil producers need the US much more than the US needs them. On a per capita basis, the US produces more oil than Nigeria.

    Our economy is so huge, relative to any other country, we are quite capable of absorbing higher energy prices.

    The inscrutable Odograph admires the Japanese. You might think differently if you lived there. Perhaps Rice Farmer could illuminate us. It seems to me there is a sort of top-down enforced austerity and sacrifice that would never work in the US.

    Toyota can afford to produce the money-losing Prius as a gimmick because their Japanese shareholders don’t expect much return on capital and the typical Japanese saver makes a negative real return on investments).

  5. We also have the largest supply of coal, advanced nuclear technology, and huge areas of wasteland that, if we were determined enough, we could use to produce solar power. Teamed with Canada and Australia, our position would be even stronger. We need to go on a “war footing” w.r.t. energy.

  6. Well, oil hit $100 for all of one suspicious trade. I expect oil to trade lower and lower for years.
    Why? Check out demand. Thailand’s demand is less every year despite an economy that is growing by 4 percent per annum. If Thailand can accomplish that, what about the rest of the world?
    Europe’s demand is less every year. US has moved into negative growth also. These trends will accelerate.
    There is a point in the horribly named “Export Land Model,” in that that Oil Thug States are keeping more of their own oil for domestic consumption. And the Thug States make oil development difficult.
    Geologically, there is plenty of the devil’s excrement left in the ground. Politically, the devil is in control.
    Still, all in all, it is difficult to make a case that oil prices can stay up, given record production and falling demand.
    The year 2008 will probably mark a down year for demand. I think 2007 was the year of Peak Demand.
    The good news is the evidently the world will be able to transition to a post-fossil oil economy without too much disruption (apologies to average people in poor nations who will suffer).
    The horror stories so loved by doomsters do not seem to be coming true. Even second-world nations such as Thailand are moving ahead with sensible energy policies. The USA may be shooting itseff in the foot, but our stupidity is not global.
    It may be five years, even 10 years before PHEVs or other very high MPG cars are seen on US streets commonly. But such a vehicle marks a permanent solution to our energy problems.
    We know we can make electricity without any imports. We have coal, nukes, wind, geothermal, wind. Most oil is used in cars and trucks.
    The energy probelm is an easy one to fix.
    The real problem is fixing the governments of Thug States so that they treat their own citizens with respect and join the world. Now, there is a problem for which I have no solutions.

  7. Scientific American has a Grand Solar Plan. It’s easy to quibble with details, but the magnitude of numbers is interesting. $420b of total subsidies over many decades is less than we spend each year importing oil at current prices.

    Toyota can afford to produce the money-losing Prius as a gimmick

    You still buy this myth? Hybrids now make up >10% of Toyota’s sales, growing every year as they spread the technology across all their product lines. A “money losing gimmick”??? Toyota is the most profitable car company on earth.

  8. Your GM link doesn’t seem to work…

    Didn’t GM just win Green Car of Year for Tahoe Hybrid, a V8 SUV? Does a mighty 21 mpg in urban 😉

    Perhaps whoever gives the awards is out of tune with the buying public.

  9. Doggydog–
    You might also mention that the size of the subsidy mentioned by SA – $420 billion — is less than the ost so far of running the Iraq War.
    $420 billion is peanuts. We will probably spend more than that on cosmetics, fashion-clothes and sugary soft drinks in the next 30 years.
    That’s why I say there is no energy crisis. This is a problem we can easily solve, while raising U.S. living standards and obtaining a cleaner environment.
    Give to me such problems every day of my life.

  10. Regarding the GM V8 program cancellation:
    – Their high end performance models traditionally use OHV designs for simplicity and weight
    – The new DOHC V8 would have offered a marginal fuel economy and power improvement over the ‘basic’ OHV V8
    – Without a big market for powerful premium feature engines this new 6.2L DOHC has no place
    – The new 4.5L V8 premium turbodiesel could well have displaced this engine, given the 25% better fuel economy and high torque output (520+ ft/lbs)

    I’ve heard about the Ford V8 high feature engine program being on and off for years, but now they are more committed since I believe they will be offering a flex-fuel twin turbo SOHC V8 as an alternative to the diesel made by International (whom they’ve had much problems with in the past) in their trucks.

  11. A premium OHC V8 for was probably not terribly attractive for GM when they could implement direct fuel injection on the already high volume OHV engines to have premium power levels and improved fuel economy. (They’re already using cylinder deactivation and variable valve timing to improve fuel economy in OHV engines)

  12. First, I love Toyotas. Our family has owned a Celica GT and a couple of Camrys. Our 33 mpg 1987 Camry wagon was one of the best cars I’ve owned (except for the stupid passive seat belt system).

    I would agree that Prius selling today makes a slight profit on a per unit basis. Probably less than some Toyota models. However, the Prius cost over $1 billion to develop. Add promotional costs to that figure and the early year subsidies, it is unclear whether the ROI on the Prius is positive. Worldwide, Toyota has sold something like 30 million Corollas but only 1,000,000 Prius. So each Prius is tagged with $1,000 in development costs. The hybrid drive is only available on the Prius and some models of the Camry and Highlander with the Sienna planned for 2010. So hybrids aren’t spreading across their product line, maybe some day.

    GM is losing money on LOTS of vehicles. One of their problems being massive salary and benefits granted to workers during more profitable years. They have an edge on large SUVs and pickups, just the cars that americans are not buying right now.

  13. So from the original post “General Motors Corp., the world’s largest automaker, canceled a $300 million program to build an advanced V-8 engine[…]”

    I don’t suppose we’d have trol … err, comments about how unfair it is that GM “loses money” those initial V-8s, after development?

  14. Odo – of course. GM may have looked at the $300 million and figured out how many engines they might sell and scrapped the whole idea.

    I would say the same thing about the Volt. If and when it hits production, it will be a money loser until it recoups the initial cost of development.

  15. FWIW, I won’t complain about any normal business R&D, tooling costs, etc.

    When done properly they are part of good business, and are not good for “money-losing Prius as a gimmick” style “zingers.”

    (Gosh, when the first crack open a new oil field, or float a north sea platform, those rotten oil companies are offering “money-losing [oil] as a gimmick”).

  16. Note to RR

    The Energy Blog, read section entitled “Happy New Year.” I hope thought-provoking.

  17. Even the clueless GM or Ford will figure it out sooner or later. They should have been doing this a decade ago. And 40 mpg by 2020, well, they’ve been fighting measures improved mpg standards all the way that would have benefit them. Survival is optional and they keep proving it.

  18. Odo – big difference between oil and Prius. Any single oil field can sell all its oil into the world market and not worry. The upfront costs get amortized over the total production. Toyota may sell enough Prius to recover their $1 billion up front costs.

    At one time we treated R&D and exploration costs as sunk. Just a couple of months ago I had to kill an expensive R&D program because it would take too long to recoup the up front costs.

  19. KINUACHDRACH–

    interesting point–sell ’em food!

    good unless they buy up all critical AG resources[farmland,fert, equipment companies etc] with petrodollars. i believe they are establishing their own petrochemical industry. AG industry needs lotsa oil products to operate.

    looks like an exercise in attrition. who wins ?

    maybe that’s what happens when you take on too much debt[ rich son becomes pauper, sells family assets to survive[or something like that]

    which role are we in?

    DILEMMA!!??

    FRAN

  20. interesting point–sell ’em food! … good unless they buy up all critical AG resources

    Does it really matter who owns things? After all, the French own Motel 6, and the Brits own Burger King. Apart from the dreadful quality of the advertising for BK, how would anyone know? If the Saudis end up owning all the agricultural land in the US, that land will still be in the US.

    The reality is that agricultural exporters need lots of oil (& oil-derived products) to produce exportable food. Gives food-importing oil exporters a strong incentive to keep the oil coming. And if the oil exporters end up owning agricultural assets outside their borders, that simply gives them yet another incentive to keep exporting oil.

    Everyone benefits from trade — national & international. The only real concern is that some country may try to use trade as a weapon. But that is much more of a concern with Russia’s gas exports to the EU than with Middle Eastern oil exporters. And is anyone going to shed a tear over those self-involved Europeans?

    Bottom line is that change is certainly coming to our world — we just can’t predict how or when.

    If western countries carry on as at present, we are doomed. If we can back away from the environmental extremists, dump the unscientific nonsense about anthropogenic global warming, push nuclear fission in a very big way, reindustrialise — then the future will be quite bright. Different, but bright & exciting.

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