JUN
2

GM Bankruptcy: Foreshadowing?

 

With the historic announcement of the bankruptcy filing of GM, the government has committed enormous taxpayer resources to making the company a viable business.  Whatever public policies and business strategies may be implemented going forward, the price of oil promises to play an enormous role in the fate of GM, and the indicators are troubling.

 

Even at the trough of a deep recession that has driven energy consumption down substantially, oil prices are rising and now near $70 per barrel.  Although a weakening U.S. dollar has contributed to the trend, this increase reflects growing confidence in the prospects for a global economic recovery in the years ahead.  At the same time, worldwide oil production has been curbed sharply in response to the 'demand destruction' of the economic contraction of late.

 

These factors create the potential for a massive energy price spike that will be fueled, eventually, by a rapid expansion of energy demand at a time of lagging oil production.  If U.S. monetary and fiscal policy results in an even weaker dollar, oil, which is priced in dollars, could significantly exceed the record prices of last year.

 

Regrettably, there is little in the short term that can be done to insulate GM from the consequences of high oil prices.  And that means the latest government support for GM may just be a bridge to another bankruptcy.

 

For policymakers, the long-term goal is clear: reduce the oil intensity of the American economy by delinking the transportation sector from oil.