High Oil Prices May Undermine Ford, GM, U.S.-Market Recovery

Persistently high oil prices could stall the recovery at Ford and General Motors, and boost Japanese carmakers and Europeans like Daimler, BMW and Volkswagen, Moody’s Investors Service said.

The price of crude oil has jumped to around $115 from below $80 last September, as demand has recovered after the global recession. Worries about Middle East supplies this year have also put upward pressure on prices.

“So far in 2011, crude oil prices have staged a rally that has approached the magnitude of a spike,” Moody’s said.

“Persistent high fuel prices could stall the post-downturn recovery for automakers such as Ford Motor and General Motors. Japanese carmakers and European companies Daimler, BMW and Volkswagen will see some safety in their broad portfolios of cars, which are less dependent on fuel-consuming SUVs and more aligned with the trend toward fuel-efficient vehicles,” Moody’s said.

“A persistent period of high oil prices – even if nowhere nearer July 2008’s record of $147 a barrel – will eventually weaken the ongoing worldwide economic recovery,” said Moody’s in a report, which also identified airlines, gaming and agriculture sectors as most prone to damage from oil price increases.

“The U.S. auto industry anticipates sales of 13 million in 2011, up 12 per cent from 2010, but sustained high gasoline prices could make it difficult to reach that target. In late March 2011, U.S. gasoline prices of about $3.50 a gallon were still well below their 2008 peaks of $4. A sustained return to $4 would push consumer demand away from trucks and SUVs towards cars and crossover vehicles, which offer lower margins (to manufacturers). The ratio of U.S. car and truck sales shifted from 46/54 in 2007 to 51/49 by 2009, but back to 48/52 in 2010 as gasoline prices eased. High fuel prices could reverse that ratio again,” the report said.

Ford and GM are now better prepared for high gas prices and both have significantly lower break-even revenue levels. Both have also made their cars more competitive with Asians, according to Moody’s.

Neil Winton – March 27, 2011