Jan. 9, 2008, 9:54AM
COMMENTARY
$2,500 cars = $200 oil?
By LOREN STEFFY
Copyright 2007 Houston Chronicle
Last week we were talking about oil hitting $100.
Is it too early to think about $200?
Not on the New York Mercantile Exchange. Options for December delivery of crude at $200 are the hottest bet in the market, with the number of contracts rising a record tenfold in the past two months, according to Bloomberg News.
Options are basically an insurance policy that traders use to protect themselves from the possibility that crude prices will double this year as they did last year.
While the chance of hitting $200 in a year is unlikely,
the surge in the options speaks to the changing nature of the world's oil economy.
Oil prices have been rising because worldwide supply is struggling to keep pace with demand.
Political unrest in Nigeria, for example, has crimped production from that country during the past two years.
Mexico has seen production from its most prolific oil field fall significantly.
Saudi Arabia missed a key deadline for starting production from a new
field.
No time to relax
All of this, of course, is what helped push oil to $100 last week. Perhaps you even breathed a little easier as prices settled back this week.
Don't.
On Thursday, the Indian automaker Tata Motors is expected to unveil a car that sells for $2,500.
That's less than some Americans will spend on a big-screen high-definition television before the Super Bowl. But it's within reach for many in India's emerging middle class, where the nominal per capita income is $1,089, according to the International Monetary
Fund.
Car of sacrifices
The car, of course, is not something most Americans would want to drive. Tata's design codifies cheap, and the sacrifices are legion, according to a description in the New York Times. Standard safety equipment for most U.S. vehicles, for example, costs more than $2,500.
The new Tata will not, by our standards, be safe or environmentally friendly, and it probably won't be fun to drive. It has a maximum horsepower of about 35, the Times reported, so it's more lawn mower than muscle car.
But that's not the point. Tata knows that most people who already own cars won't be interested in its new model, whose name hasn't been revealed.
It's targeting the hundreds of millions of people in the developing world who now ride scooters or bicycles or walk.
If it succeeds, crude prices may continue their climb of the past year. The Tata probably will consume far less gasoline than the sport utility monstrosities common on American highways, but even the addition of several hundred million lawn mowers would rattle the markets.
"This is going to really shoot demand to levels we have not seen before," said Michael Economides, an oil expert at the University of Houston and a former adviser to several state-owned oil companies. "That's going to open up segments of the population that weren't accessible."
In China, for example, demand for oil surged in recent years as more people moved to urban areas, their incomes rose, and they bought cars. Now, 1,000 new cars take to the streets of Beijing daily, Economides said.
Mobility options
Tata is, in essence, offering mobility to the emerging middle-class economies of India, Vietnam, Pakistan, China and much of Africa. We know, better than anyone, what a middle class does when it adopts a device that fundamentally changes lifestyles: It never lets
go.
In fact, it upgrades. The people buying $2,500 Tatas today will someday be buying more expensive models with more car-ness — bigger and heavier bodies, more powerful engines and more options like air conditioning and electronics. All of which translates into even greater demand for fuel.
"The price of oil is becoming less and less dependent on what happens in the U.S.," Economides said.
Today's glorified lawn mowers could be the emerging world's Model T.
That's why the Model T's maker also is angling on the Indian market. Ford said Tuesday it's doubling production in India, investing $500 million and plans to make an inexpensive car.
Renault-Nissan and an Indian-Japanese joint venture also are working on cheap cars, the Times reported.
So, last week we saw $100 oil, and this week we're talking about $200.
It may seem far-fetched given that all signs indicate the U.S., the world's biggest energy consuming economy, is headed into recession. Oil forecasters surveyed by Bloomberg are predicting that prices will fall as low as $75 a barrel by the fourth quarter.
Doubts it's going down
Economides doesn't buy it.
"I see it only going up, not down," he said.
On the floor of the Nymex, some traders aren't taking any chances. More than 5,000 option contracts at $200 have been sold.
Sooner or later, all those glorified lawn mowers are going to need fill-ups.
Loren Steffy is the Chronicle's business columnist. His commentary appears Sundays, Wednesdays and Fridays. Contact him at loren.steffy@chron.com. His blog is at blogs.chron.com.
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