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Tuesday, August 29, 2006

Detroit Ostrich Farm: Gas Prices To Stay High

After months of $3 gas and predictions that crude oil coud climb above $80 by the end of the year, Detroit executives are admitting that they need to brace for another several years of high fuel prices. They appear to have been the last to know.

According to The New York Times, the head of the Chrysler Group said the the company expects gas prices to stay in the $3 to $4 range for the rest of the decade. Ford's chief sales analyst joined the small chorus.

Chrysler also said that it would "prepare a new business model" in light of its new viewpoint of the price of gas.

What was left unsaid is that the higher gas prices will cause a more lengthy depression in the domestic auto industry. Sales of SUVs and pick-ups are still the most profitable vehicles in the line-ups of the Big Three, although sales of these models were off 30% to 40% in July. The reality of the situation is that companies like Toyota and Honda already have product lines replete with cars that get better than 30 miles per gallon. They depend less on light trucks.

The consequences for Detroit are fairly dire. GM and Ford has been very public about their attempts to cut costs through lay-offs, worker buy-outs, and plant closings. Ford has even cut its dividend and board compensation.

The recognition that gas will stay high is also a signal that sales from domestic car makers will stay low, at least for the foreseeable future. Moving production from SUVs and pick-ups to smaller cars will be time consuming and expensive. The auto giants also have smaller margins on petite cars with tiny engines, which will put further pressure on margins.

Industry reports indicate that designing and changing models can take a car company from 18 months to two-and-a-half years. Toyota does it faster than average. GM's track record is fairly good, but Ford's time to market with new products has been poor. That means that as sales of older vehicles fall due to poor fuel economy it will be easier for Japanese competition to take market share, at least until Detroit redesigns and retools. By then, foreign cars could have a huge share of the North American car market.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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