Friday, July 31, 2009

Cash for Clunkers Effects

7/31/09 1:59 am - I'm predicting that today's markets will open with oil and steel companies declining, while car companies rise.

I just read some news about the Cash for Clunkers federal stimulus program running out of money. The $1 billion of funding that Congress thought would last until November, or four months after going into effect July 1st, was spent in less than a month. In other words, people bought up around a quarter million more efficient cars.

I have to wonder how much gas will be saved. These were some of the least efficient cars (or, more likely, trucks and SUVs) on the road. I think the oil companies must be worrying over equations like this:

[1/4 million cars] X [average gas saved per mile] X [average miles driven per year] = [total reduction in gasoline sold in the next 12 months]

That may not be a huge reduction to their bottom line, but in markets that only like growth, the oil stocks will fall. And those vehicles will really be off the road: the dealers must send them to be crushed or they won't be paid the rebate money. So the supply of recycled steel will rise, sending steel prices down.

U.S. drivers will send less money to the oil industry and more to the auto industry, so car company stocks will rise. Which will probably mean the bailed-out U.S. auto manufacturers pay back the bail-out money sooner. And with customers preferring the efficient models over the gas guzzlers, the manufacturers will prefer to make those more efficient cars.

Such a positive response from both the consumers and the auto companies will drive Congress to add more funding. Once they do, there may be a repeat of these declines and rises. But it will be interesting to see what the difference in effect will be if the criteria are toughened, as some in Congress are advocating.

Lastly, with the average weight of cars going down, the easiest way to improve mileages, the number of auto fatalities might decline as well. We won't have data on this aspect for some time, though.

I will post a follow up later today to evaluate how good a guess I made in the short term.


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