Oil and the Big 3

Well oil just keeps on falling. It closed today at $43.65, down almost 7% for the day and down a jaw-dropping 70% from its peak in July. Today's close marks a 4 year low. What happened to $200 oil that Goldman was predicting this summer? Merrill analysts today said that they are predicting oil at $25 next year. I remain a long term oil bull but am not making any plays until the market shows some signs of correction, beyond a week long bounce. When I say long term, I mean over the course of my working life. I am 22, so my investment horizon for oil plays is up to 35 years.

Moving on to the Big 3. Today they said they would be willing to accept strong government oversight in exchange for immediate aid (Chrysler and GM have said they need help soon, while Ford says they hope not to have to tap potential government credit lines, but would like to have them available just in case). They are looking for a total of $34B. I don't think they should get it, bankruptcy is a better option. My thinking is as follows: if the Big 3 enter Chapter 11 bankruptcy (something firms do regularly - think airlines), they will gain leverage in negotiations with both their creditors and the United Auto Workers (UAW). That is, they will be able to say to these parties "if you don't come to the bargaining table, we will go under and then we are all ******". They will be able to negotiate better terms on their outstanding debt, as well as cutting pay and benefits to UAW (which in my opinion are both excessive). Without entering bankruptcy, they will not have this advantage at the negotiating table and, while the UAW is granting some concessions, they are not nearly what they need to be for these firms to return to profitability.

The argument against bankruptcy is as follows: if the firms enter bankruptcy, customers will be unwilling to buy cars from these firms because they will be worried about the car companies' abilities to live up to their warranty obligations. This is where the government plays a role: they set up a fund to guarantee the warranties on these vehicles in the case of any of the Big 3 shutting down, much like the FDIC insures bank deposits.

I must confess, these opinions are not my own, I believe I read them on The Big Picture, but it may have been elsewhere. Regardless, now you've heard the much less publicized bankruptcy argument.

The market rallied again today. More choppy action, no surprises there. The question I am wanting answered is: when (if ever) is the precipitous fall in the price of oil going to stimulate the global economy?