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Schork Oil Outlook: $110 Oil — US Consumers Need an Intervention

Friday, 25 Feb 2011 | 1:29 PM ET

The UAW trust (VEBA) earned around $3.4 billion last November by selling a third of its allotted stake (102 million shares at $33 per) in GM’s IPO.

Analysts’ estimates peg the VEBA’s break-even on its remaining shares at $37. However, as discussed in the January 06th issue of The Schork Report, it might be a while before the VEBA is able to cash in its chips. Yesterday, GM’s stock traded below its $33 IPO price.

While GM 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.

GM and its shareholders now have a problem. The disconnect with Nymex oil aside, light-sweet crude oil, be it from the U.S. Gulf, North Sea or West Africa is trading comfortably above $110 a barrel. At this price U.S. consumers will be paying in excess of $3.50 at the pump this summer.

As Frank Zappa would say regarding GM’s situation, $3.50 is the crux of the biscuit. To wit, GM’s stock is trading at less than a 10 multiple to retail gasoline. To put this ratio into perspective, in the 1990’s GM’s stock averaged nearly a 40 multiple to gasoline.

Then again, through the 1990s the nominal cost of Nymex crude oil averaged $20.25 (!!) a barrel. 1998 saw the lowest inflation-adjusted gasoline prices on record. Little wonder then that the U.S. consumer got hooked on gasoline during this period of ignorant bliss. Therefore, this “addiction” to oil (as Bush labeled it in his 2006 State of the Union address and which Obama reiterated in his 2008 DNC acceptance speech) was sowed in the 1990s.

As such, GM and Chrysler were all too willing to feed our addiction to cheap gasoline. Unfortunately for Detroit, not to mention the U.S. taxpayer, these two stalwarts of U.S. industry had no plan B should energy ever regress to the real cost (inflation adjusted) of gasoline.

Cheap oil through the 1990s created the template for today’s alleged “addiction.” The ‘90s would have been an ideal time to address the issue. Rather, a Democratic White House, aided and abetted by a Republican Congress, chose instead to release barrels from the Strategic Petroleum Reserve (1996 and 2000).

In hindsight, we would like to think it could have been different; but given the survival instincts of politicians, that is not realistic. For our Beltway Bandits (cue another Zappa-ism) it is just easier to kick the can down the road until such a point when we, the taxpayer, have to bail them out… for the greater good of course (case in point, see the yet-to-be addressed looming Social Security crisis).

As written in today’s issue of The Schork Report, it’s akin to steroids in Major League Baseball in the 1990s; in retrospect, we knew the addiction was there, but times were good, so no one wanted to talk about it… until we had to. As far as our addiction to oil goes, we have to talk about it now!

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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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