Why the Financial Crisis Isn’t All Bad News
By Chris Haak
10.10.2008
Amid the doom and gloom on Wall Street – such as seven straight days of huge losses, putting the Dow Jones Industrial Average close to where it was more than 10 years ago, meaning that – at least for the short term – your money would have been safer tucked into a mattress, the news is not completely bad. There are some positives for consumers and motorists, as long as they are able to keep their jobs and have good credit ratings. Don’t get me wrong – I’m not rooting for this disaster (and that’s what it is) to keep us in its clutches only for cheaper gas; I’ve lost nearly half of my retirement savings in the past quarter – but there are some bright spots to point out amidst this drumbeat of bad news.
Foremost is that oil prices have dropped precipitously. Forget all of the talk during this past summer that a barrel of light sweet crude would hit $200 by Labor Day; from its all-time peak of about $147 back in July 2008, the price of oil is now $81.16 as of this writing (down $5.46 already today), or down about 45%, or almost $66 from its peak. While an $81 barrel of oil still isn’t cheap, it’s still far more palatable for most than a $147 barrel of oil. Even after such a huge drop in crude prices, it’s still right about where it was a year ago, which illustrates not only the scale of the run up in prices earlier in 2008, but also the steepness of their decline over the past month or two. While prices at the pump are yet to reflect the new reality of cheaper crude, refineries in the Gulf Coast still have not fully recovered from Hurricane Ike, so that is to be expected. As more of the refineries that were shut down or damaged are brought back online, gasoline prices will fall further, although even now, they’re back to levels not seen in several months.
Second, for those who have good credit scores, it’s not a bad time to buy a new car with all of the deals out there. The captive finance companies of GM, Ford, and Chrysler aren’t really in a financial position to offer competitive interest rates or lease deals, but there are still financing deals to be found elsewhere. For instance, Toyota is offering 0% financing on 11 of its models – an unprecedented step for Toyota, but one made easier by Toyota Financial Services’ stellar credit rating. Honda has several good lease deals on their website right now, as well as low-interest loans (as low as 0.9%) on pretty much all of the lineup except for the new-for-2009 Fit. But even in the absence of low-interest deals, high incentives from nearly all manufacturers make a 6% interest rate more palatable. A friend just bought a 2008 F-150 base model for $15,000 after a $5,000 rebate, but the interest rate quoted to him was 9.9% on a three year loan, in spite of it being purchased for a multimillion dollar profitable business. Fortunately for his situation, the company has access to other sources of financing, so won’t have to pay so much for the short-duration loan.
There are also geopolitical benefits of lower oil prices. The lower price of oil, plus reduced demand in the US, means that less money is being sent to the Middle East, as well as to other oil exporting countries that aren’t particularly friendly to the US. According to an article in yesterday’s Wall Street Journal, Venezuela and Iran, in particular, are about to feel serious budget squeezes as oil prices retreat. According to Washington consulting firm PFC Energy, Venezuela needs oil prices to remain above $95 per barrel to pay for Hugo Chavez’s expensive social programs and nationalization efforts. Saudi Arabia requires an oil price of $55 per barrel to have a balanced budget, but even that figure is triple what it was eight years ago. It is believed that Iran’s bottom price is similar to Saudi Arabia’s, although analysts expect that Iran will soon have to reduce subsidies and slash government spending if prices remain below $90 per barrel. Finally, Russia’s 2009 budget assumes an $82 price for Russian Urals Crude, which is cheaper than the international benchmark light sweet crude, so Russia could also face cutbacks or deficit budgets.
The counterpoint to the price squeeze that producing countries are feeling is that the evaporation of credit markets, plus less cash flow from pumping oil, could put some development projects on hold, which might improve future oil supplies. We can also hope that consumers learned their lessons that oil prices can quickly jump into the stratosphere when making their vehicle purchasing decisions so that demand stays lower than it has traditionally been, keeping prices more moderate. However, if the stock market doesn’t stop its steep declines soon, there will be much less money in the market for people to use to purchase cars and trucks, not to mention everything else, which becomes an enormous problem for Ford, GM, and Chrysler. If there isn’t a turnaround in credit availability shortly, any or all of those three companies could find themselves in Chapter 11 bankruptcy proceedings.
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