why is gas so cheap?

[BridgeTroll]

The worst thing is the clowns in the Democrat party (and some silly Republicans) have imposed all these CAFE standards on the manufacturers and are still extorting all these promises that Detroit will build these small cars that most people do not want.  The best thing for Detroit would be if gas prices stay low and SUV sales pick up again.  SUVs are more profitable for the manufacturer and Detroit has the edge in them at present.

While I agree that mandatory standards are regressive and Detroit should not be required to follow them... I disagree with your theory that

The best thing for Detroit would be if gas prices stay low and SUV sales pick up again.

This is suicide.  While possibly profitable short term for Detroit... their lack of vision and innovation is what brings them to the brink of bankruptcy and "too big to fail" status.

They need to put their marketing genius to work convincing the american public that smaller fuel efficiant vehicles are desireable.

[jaxnative]

The best thing for Detroit and the govenment is to let the CONSUMER decide.  This is an issue that begs the question of how far we are willing to let the government interfere in the free market.  Should a small number of government bureaucrats decide the types of vehicles we will be allowed to purchase or should that decision be left up to the manufacturers and the millions of consumers?  If the manufacturers do not react to the changing markets fast enough or will not make a serious effort to control their costs they should pay the price.  The foreign manufacturers are weathering the storm quite well and don't forget the Toyota Tundra's, Nissan Titans, and the many other full size trucks and SUV's that the foreign manufacturers have been producing and selling all along.  Government interference has already made one hell of a mess out of the financial industry.  The automotive industry doesn't need that kind of help.

[BridgeTroll]

I agree with everything you said.  However...

If the manufacturers do not react to the changing markets fast enough or will not make a serious effort to control their costs they should pay the price.

... is where we are now.  Their argument is ...oops... sorry... bail us out... we are too big to fail.

[jaxnative]

Their argument is ...oops... sorry... bail us out... we are too big to fail.

So true, BT.  I would like to know what their definition of "fail" is.  Are they saying that without this bailout money they will shut their doors or is it more precise to say that they are desperately trying to avoid the pain of a desperately needed reorganization. 

There are still a lot of questions that need to be addressed.

[RiversideGator]

Everyone keeps saying "bail out" as if the money were a gift.  My understanding is that they are asking for loans, not gifts, which would be paid back.

As for consumer preferences, the consumer appears to prefer big cars and SUVs as long as gas is reasonably priced.

[Clem1029]

So true, BT.  I would like to know what their definition of "fail" is.  Are they saying that without this bailout money they will shut their doors or is it more precise to say that they are desperately trying to avoid the pain of a desperately needed reorganization. 

What "fail" means is a good question here. I think all the coverage is making the mistake of talking of the "Big 3" as if they were a single entity. Looking at each one individually paints a stark picture.

As much as it pains me to say it - GM as we know it is history (pains me for personal reasons - my Grandfather worked his entire life for GM...I realize it's not the same company as it was then, but still). Probably the most under-covered angle to this story is the part where GM is literally going to be out of money by the end of the year (or, maybe a week or two into 09). Not "ok, things are tight, rack up some debt" out of money, but literally, "we can't cut you a paycheck because if you cash it it will bounce" out of money. So while I agree they need some painful reorganization, they don't have the money to go Chapter 11 - Ch11 means functionality basically continues while the reorganization happens. So even if they go Ch11, they can't pay people to continue operating. The only way that happens is if they get a loan that allows them to continue functioning while reorganizing. And if, in this credit market, anyone believes GM could get a loan from a bank to allow them to operate under Chapter 11, I've got a bridge in New York you might want to get a loan to buy while you're at it. Which means, in GM's case, the government is literally the "lender of last resort."

On the other end of the spectrum, you have Ford. Ford is probably positioned the best to get through this - they actually have the capital on hand to reorganize (maybe even without going Ch11). But let's be honest...if my major competitor is going to get some cash from the government to reorganize, why they heck shouldn't I be there too? Or, more importantly in Ford's case, what happens if GM goes completely under? GM goes, a good number of their suppliers disappear too - and they happen to be Ford's suppliers too. So Ford at least has a vested interest in GM at least reorganizing rather than going completely under (not to mention the ridiculous impact GM completely disappearing would have on the economy overall).

So "fail" depends on how the government wants to approach it. I promise you, if they get an outright, no strings bail out, they they'll be back in March saying they need more money. I'm of the position that if any of those companies get cash, it comes with a Chapter 11 requirement - they can get the money to continue operating as they reorganize.

At the same time, this should be addressed...

Everyone keeps saying "bail out" as if the money were a gift.  My understanding is that they are asking for loans, not gifts, which would be paid back.

As for consumer preferences, the consumer appears to prefer big cars and SUVs as long as gas is reasonably priced.

River, you know in general I've got your back on these positions, but as far as the Big 3 goes, it's really naive to consider these loans. I'll agree with you that calling the financial/TARP program a "bailout" is wrong - those were legitimate loans, that I fully expect the government to get most of that money back  (if not come out ahead in the deal). But there's a reason why no bank would lend to GM right now - there's no way they pay that back. Or, rather, they'd pay it back once inflation renders the original amount meaningless. Money that would go to the Big 3 is going to be a bailout - nothing more, nothing less. That's why I take the position that the money has to have major requirements attached - because I have no faith that money is ever coming back.

On the SUV thing, I think that's a bit of penny-wise, pound foolish. I agree that when gas is cheap, consumers love SUVs. And yes, right now, the Big 3 are geared to sell SUVs to a clamoring consumer base, so a short-term desire for SUVs would solve a lot of the problems. But all that means is continuing an imbalanced business model - we're here today because people stopped buying the SUVs to begin with. The revenue stream disappeared, which means they couldn't pay their (admittedly ridiculous) union commitments, and now they're begging for survival.

Personally, I think what they need is a forced reorganization so that they can concentrate on stuff like the Volt and it's siblings - cost-efficient fuel-efficient vehicles. Not for any standards, but because the market has shifted - the majority of the consumer base won't buy overpriced fuel-efficient cars (really - how many Prius do you see on the road?)...but given a reasonably priced car that's fuel efficient? In this market, they'll jump. $4.00 gas is too clear in the current market's mind for people to go back to their standard SUV ways. The Big 3 needs a balanced production line, not something for a single market.

[jaxnative]

I'm of the position that if any of those companies get cash, it comes with a Chapter 11 requirement - they can get the money to continue operating as they reorganize.

I hope that this type of common sense arrangement can be presented and accepted.  I don't see GM having an option of refusal and the taxpayers should expect no less.

[Doctor_K]

Further:
http://biz.yahoo.com/rb/081219/business_us_markets_oil.html

Reuters
Oil falls over 6 percent on demand outlook

Friday December 19, 3:33 pm ET
By Edward McAllister

NEW YORK (Reuters) - Oil fell over 6 percent on Friday, as fears of economic slowdown weighed heavier than proposed production cuts by the world's major oil exporters.

U.S. light crude for January delivery, which expired Friday, settled down $2.35 at $33.87 a barrel, the lowest since February 10, 2004, when it ended at the same level.

The more active February contract settled up 69 cents at $42.36 a barrel with cuts in OPEC production expected to take hold in that month.

London Brent crude gained 64 cents, settling at $44.00.

Friday marks the sixth consecutive day of falls in oil, off more than 29 percent from the $47.98 seen when prices last rose on December 11.

Oil prices have fallen more than $100 from their peak above $147 in July as a global economic downturn ripped into global oil demand, and looked set for one of their biggest weekly declines for years.