Car Crash.

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Author: Easterbrook, Gregg

Katrina stalls Detroit.

Although officials had long known disaster could happen, they took no action. They ignored warnings from environmentalists, engineers, and analysts. Somber reports foreshadowing the possible calamity were quietly filed away. In public, officials maintained that everything was fine--until disaster struck and it became obvious to all that everything was not fine, and might never be so again. New Orleans? I'm talking about Detroit.

New Orleans, Gulfport, and other cities ravaged by Hurricane Katrina have sustained horrible damage. But, with the help of insurers and federal taxpayers, they will recover--at least economically. The Big Three automakers, on the other hand, face a more enduring problem: high gas prices. Despite decades of warnings that low pump prices could not last forever, General Motors, Ford, and Chrysler still base their sales strategies on hawking big, heavy vehicles with high-horsepower engines to customers who, until recently, never looked at the mileage sticker on the window. In August, pump prices averaging $2.61 per gallon had already caused Big Three sales to falter. Now Katrina's damage to refineries and offshore oil platforms has driven prices north of $3.00. Once production is restored, gas may become somewhat less expensive--but not low enough to stave off what should have been clear before Katrina announced it with Category Four destruction: The era of cheap gas is over and, with it, the way Detroit does business.

Detroit automakers are in no way, shape, or form prepared for the end of cheap fuel. With Congress long refusing to raise auto fuel-economy standards and White Houses of both parties repeatedly assuring automakers that Washington would do almost anything to keep inexpensive gasoline flowing, GM, Ford, and the Chrysler side of DaimlerChrysler have simply refused to deal with the fact that, someday, a perfect storm could strike petroleum markets. In recent years, the Big Three have sold more SUVs and pickup trucks than regular cars. All three now earn most of their manufacturing profits from big-vehicle sales; big SUVs are decked out as luxo land yachts that sell, on average, for more than $35,000. Moreover, the Big Three have oriented much of their capital planning around the assumption that they will be able to sell such vehicles indefinitely. Three years ago, when the Hummer was new and selling like hotcakes, GM invested billions, and required major investments by auto dealers, to set up a separate Hummer sales division with expensive macho decor showrooms to appeal to people with the Hummer personality defect. GM also dedicated substantial resources to a new generation of large SUVs, which are scheduled to reach showrooms next year. Ford and Chrysler have more big vehicles in development as well.

Even before Katrina hit, the flaws in this strategy were becoming apparent this summer, as gas prices surged. GM saw a 16 percent decline in August 2005 sales compared with August 2004, with sales of the company's big SUVs--the Hummer, Yukon, and Suburban--off by 20 percent. The entire Hummer product line may soon be history and the investment wasted. (Future collectors of amusing oddities from the twenty-first century will surely want to have one of the Hummer-branded laptop computers General Motors unveiled last week. It is available in bright yellow and, just like its namesake, wildly overpriced at $2,988.) Although Ford and Chrysler sales were up in August (after they matched discounts GM began offering in June), sales of the companies' large vehicles--the Ford Expedition and Explorer, and the Dodge Durango--were down. Almost inevitably, this drop in SUV sales will mean a drop in profits. Most analysts estimate that GM, Ford, and Chrysler earn several thousand dollars per large SUV and large pickup sold, while making slim if any profit on regular cars. If the market for big, heavy vehicles crashes, Detroit's earnings may be troubled for a long time--and Detroit's earnings were under pressure even before gasoline prices began to rise. Already this year, GM announced it would eliminate 25,000 jobs and close several North American plants.

Katrina has highlighted and perhaps accelerated the contraction of the U.S. auto industry. It is impossible to project what will happen to gasoline prices once production from offshore oil platforms in the Gulf of Mexico is restored, but it is hard to foresee any force that will drive prices down to the levels Americans have grown accustomed to in years past. The global supply of petroleum remains tight, and global demand keeps rising--sharply in China and India. Opening new oil fields, including perhaps in the Arctic National Wildlife Refuge, is expected only to replace supply from depleting existing fields, not result in the discovery of new "elephant" oil deposits that significantly increase global supplies and thus lower prices. Even once Gulf petroleum production has been restored, gas that costs $3 per gallon or more may be here to stay. Who's going to want a Hummer (twelve miles per gallon) or a Ford F-150 pickup with the V8 option (14 MPG) if each tankful costs $78? They might as well have filled the levee breaches in New Orleans with Hummers.

The Big Three have taken steps to revitalize their sales of cars with decent MPG. GM's new Malibu and Ford's new Five Hundred are snazzy sedans that get good mileage: Both offer strong competition to the Toyota Camry and Honda Accord, the industry leaders in the regular-car category. But most high-mileage GM and Ford products are either econobox deathtraps or, like the Chevy Monte Carlo, seriously out of date: It's obvious that the companies put their best efforts into their SUVs and pickup trucks. Chrysler is in better financial condition than its Detroit rivals partly because the company hit three consecutive home runs with introductions of regular cars--the classy 300C sedan, the clever Magnum sports wagon, and the spiffy new Charger, a retro muscle car. All are selling briskly, but the versions of these cars that have been selling are the high-horsepower models with powerful hemi engines. These models are likely to become less attractive as fuel prices rise. The hemi-equipped Charger gets 17 MPG in the city, which is pathetic for a sedan. Its tank holds 19 gallons. At $3 per gallon, you'll spend $57 for a fill-up, and, at 17 MPG, you'll be stopping for a fill-up often.

Might Detroit save itself by selling high-mileage gasoline-electric hybrids? Demand for hybrids seems likely to keep rising, and the Big Three have some attractive offerings in this category, including Ford's 33 MPG Escape hybrid-powered SUV. The trouble is that, while hybrids are easy on fuel, selling more of them would spell financial ruin for the automakers. Right now the hardest car to get in the United States is the very high-mileage Toyota Prius hybrid--there's often a wait to buy one. Yet Toyota has only gradually increased production, because the company loses money on Prius sales. Ford is only making a few Escape hybrids, because each one that rolls through the door represents a loss for Ford. Automakers have not yet figured out how to mass-manufacture hybrids cheaply; money-losers, hybrids are being sold mainly as an experiment. Perhaps there will be breakthroughs that allow the profitable manufacturing of hybrid vehicles: This would dramatically improve the outlook for Detroit, while reducing U.S. dependence on Middle Eastern oil and leading to lower greenhouse gas emissions. But, for the next few years at minimum, automakers' survival depends on conventional vehicles.

New Orleans will be rebuilt; the offshore oil platforms will pump anew; the Mississippi will pulse with shipping barges and casinos once more. It may take a surprisingly short time for the Gulf region to rebound. The lasting economic damage from Katrina may be felt most keenly by the U.S. auto industry. And, just like the officials who did nothing about the levees, Detroit was repeatedly warned.

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By Gregg Easterbrook