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Schork Oil Outlook: GM, Gasoline and the Crude Booms

Thursday, 6 Jan 2011 | 12:09 PM ET

UAW… get while the getting is good.

United Auto Workers Pres. Bob King… “All the sacrifices that our members made to turn these companies around were part of the process that’s really led to this amazing turnaround… We want our membership to share in a very meaningful way in the upside of these companies.”

Uh oh… The U.S.’ anorexic auto-industry cow has just started putting some weight back on and already the UAW has designs on how to butcher it. Kind of reminds us of the bumper sticker you would see in west Texas in the 1980s: "Please God let there be another oil boom and this time I promise I will not p*ss it away."

Well, 20 years later we finally got our oil boom and the cow that was General Motors went belly up. While Houston has been prudent through these “good” times it appears that Detroit is intent upon p*ssing it away all over again.

Hey, why not? When you have the largess of the taxpayer at your disposal and a government that is willing to trample over the rights of secured creditors, why not shuffle up to the trough again?

"It might be a couple of more years before the Volt supplants the Suburban as GM’s bread-and-butter." -The Schork Report, Stephen Schork

Apparently $3.4 billion, which is what the UAW trust (VEBA) earned by selling a third of its allotted shares in the company (102 million shares at $33 per), is not enough. According to estimates, the VEBA will break even on its share of the bailout if it can unload its remaining 206 million shares at $37. This then begs the question, are GM shares worth $37? Last night the stock closed at $38.07, so the UAW looks to be in pretty good shape.

Be that as it may, there is a large consensus that crude oil is headed to $100 this year. That translates into around $3.30 for the U.S. consumer at the pump… and that could translate into a headache for GM’s shareholders. For example, it is no secret that GM’s penchant in the 1990s to maximize production of gas-guzzling whales at the apparent expense of more efficient technology facilitated the company’s demise a couple of years ago when gasoline prices finally caught up to their inflation adjusted value.

While the company is striving to kick its SUV habit, it also had to slash R&D in 2008… precisely when foreign auto makers began working out the kinks in their hybrid technologies. Therefore, it might be a couple of more years before the Volt supplants the Suburban as GM’s bread-and-butter.

In this vein, GM’s shareholders just might have a difficult time with crude oil above $100. For instance, in the 1990s when retail gasoline averaged a paltry $1.15 a gallon, one share of GM stock could purchase 39 gallons. In the first half of the 2000s, retail gasoline ticked up to $1.69. While that 47% increase may seem large, it still meant gasoline prices were around 16% below the inflation adjusted pace. Therefore, a share of GM could still buy 28 gallons of gasoline.

However, the floor fell out from underneath GM in the second half of the 2000s when gasoline surged 73% to $2.93. As a result, one share in the company, before it went bankrupt, could only fetch around 9½ gallons of gasoline.

Bottom line, since the nominal price of gasoline started moving towards parity with the real price, there has been a strong negative correlation between shares of GM (and Ford for that matter) and the price of gasoline.

With last night’s settlement a share in the “new” GM can purchase around 12½ gallons of gasoline. If Wall Street is correct and crude oil surges to over $100 this year then we do not think it is unreasonable to expect GM to come under pressure.

As analyzed in today’s issue of The Schork Report, if the relationship with the company’s shares and gasoline prices revert to the mean which existed in the three years prior to GM’s bankruptcy, then a share of the company’s common stock might only be worth around $22.

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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.

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