Will Chinese Drivers Spike Oil Prices Again?

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Automotive sales around the world have fallen sharply, even in China. Lower fuel prices and a sense of tightening credit have sent many car shoppers to the used lot – and many more into the same car.

The Car Economy

Ross Perot coined the term “car economy,” but it seems now that the same economy might be coming to a grinding halt. Automakers saw a boom as oil prices surged, but recently have experienced a hard time convincing buyers to upgrade. Higher oil prices were good news for automakers that pumped out smaller and midrange cars with greater MPG statistics, which convinced buyers to step into new automobiles. The used car markets for smaller cars were virtually unavailable, and many people sold their SUVs at huge trade in losses just to save on gas. Today, buyers have little incentive for what is considered luxury in most places around the world.

China Stimulates the Car Industry

Personal ownership of a vehicle in China is virtually nonexistent, with only the richest members of society having enough money to buy a car. The government will be providing 5 billion Yuan to aid purchases in rural areas of China, where car ownership is at its lowest. The goal is to both enable personal transportation in rural areas and inevitably make the Chinese worker more productive with the ability to move goods, namely farm products, quickly and efficiently.

A Huge Undertaking

Currently 14 of the biggest companies control 90% of the total car market in China, but many are facing losses as capital purchases and employment costs are eating into profits. Even in China, with one of the few stock markets still rising in 2009, cars are not making their way off the lots. By consolidating the industry, China hopes to turn around its struggling automakers into bigger, more efficient companies. The goal is a tremendous push to grow the auto industry in China by more than 10% per year for the next three years. In contrast, the Chinese economy had grown at a near 8% rate before 2008, but recently is contracting. The official news has not been released regarding which of the firms will be forced to consolidate. The government did not produce a timetable for the effort either.

Big and Midrange, But Nothing Small

The Chinese Securities Journal reported that China would like to create two or three automaker firms with production numbers greater than two million vehicles per year, as well as four or five groups with production greater than one million vehicles annually. Cutting costs is at the core of the operation, but details are scarce.

Is it Time to Buy Oil?

China is the world's biggest possible market for private car ownership, but much of the market has hardly been tapped. Investing in China's car companies is difficult as many local governments have control of such companies and are unwilling to sell. To compensate, the best investment is in oil, as more Chinese drivers on the road means more oil use. With the government’s goals as high as 10% year over year growth for automakers, oil could spike dramatically on higher demand. In addition, recent production cuts totaling more than 6 million barrels per day will certainly keep prices high.

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