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A Big Oil Bailout of the Big Three
by MrArbitrage
www.TableofWisdom.com

To be sure, speculative fervor with the help of analyst manipulation, a weak dollar and low interest rates have had a major effect on the price of oil. Those are problems that can and should be rectified. Unlike many columns calling for more government intervention, I am laying out a proposal for private sector adaptation that could be profitable to the oil industry, automotive industry and beneficial to the finances of consumers.

My proposition was born as I sat back and asked myself the question “how do you know when oil is over-valued?” The answer came to me as follows: When the gasoline costs more than the average consumer’s vehicle, I think it’s a fairly good sign that something is askew.

For example, my profession doesn't require me to travel much and I don’t live more than 25 miles from my office; yet this month I find myself spending about the same amount as an average car payment, about $400 on gasoline. So if oil stays at these levels for a few years, and I own an average priced car, I am essentially paying more for my gas than I can expect to pay for my car.

This led me to the opinion that with the price of oil being this high, it would be a great move for a company that produces , refines and retails much of its own oil to go into this market and acquire General Motors or one of the other “Big 3”.

The business model would be like that of the cell phone companies. I know there are phones for which people pay hundreds of dollars now but once they reach “critical mass”, no matter how high tech, they all eventually become commoditized and wireless service providers end up giving them away for free or close to free - in exchange for a 1-2 year service contract. That of course is because it makes sense to do so as the real money is in the monthly annuity created by the service contract, which guarantees them a minimum amount of revenue.

Naturally, as consumers we hope that oil will eventually settle down in price but the present situation could create an opportunity for the oil companies to “lock in” customer’s patronage on multiple levels.

I know that Exxon mobile has announced plans to shed its retail outlets over the next few years but for example, they could buy out GM, currently selling at around a $6 billion market cap, which is a fraction of Exxon’s 1st quarter’s profits of $10.89 Billion. Plus, the market cap of Exxon is almost a half of a TRILLION dollars – so an acquisition of GM at 2X the current price would be a blip when considering a partial stock/cash deal.


Advantages for oil companies:

A company like Exxon could sell or lease the automobiles at regular price to consumers who want the car with no strings; however, they could also offer to sell or lease the cars at deep discounts to consumers and businesses that contract to buy their gasoline from Exxon stations and/or retail gas stations that are SUPPLIED by Exxon. To protect the consumer, the contract could assure them that they won’t pay more than a specific percentage above cost so if gasoline drops 50% a year later, they won't be stuck paying a substantially higher price but rather a lower price, yet still guaranteeing the specific price over cost to the oil company. It could be structured like an adjustable mortgage (Prime+ whatever percent).

With current technology, this could be easily accomplished. The major companies like Exxon, Chevron, Shell and BP are virtually everywhere. GPS navigation systems could point out the locations of all eligible gas stations around the country for the consumer. Credits for the monthly gasoline payments could be sent to a card, like a pre-paid phone card and used at any eligible station. If the customer needs to pay cash, they can do so and while at the station, have the cash transaction recorded toward their minimum monthly required gasoline purchase (which would be agreed to at the purchase or lease of the automobile).

Because gasoline is a commodity, it has always been difficult for oil companies to maintain consumer loyalty. They have tried to do so by issuing credit cards and even running national television commercials to try to sell us on the virtues of their higher octane or cleansing properties. Most people don't buy into that; most people look for the lowest price even if it's by a penny.

By essentially bundling the automobile with a gasoline service contract like a cell phone package, the oil company could essentially guarantee itself 99% loyalty. Because oil prices fluctuate on the world market, they couldn't necessarily guarantee a specific price over the contract years, unless they wanted to hedge, but the oil company could guarantee a specific price over the cost of producing, refining and transporting the fuel, guaranteeing a profit from each contract.

It would also be a nice hedge since more fuel efficient vehicles will eventually cause a major decline in gasoline consumption. So if “big oil” were to act now and acquire these auto companies while the autos are dirt cheap and oil stocks have enormously strong currency in their stock, when the day comes that oil is less valuable, the automotive segment can offset their loss of oil profits.

Times are bad for the automotive sector and congress knows that we have a major problem if the US auto companies were to go under. They are looking for someone to blame and oil companies are the perfect scapegoat. Therefore, oil companies face a serious threat of being plundered by well intended federal bureaucrats just like “big tobacco” was in the late 1990's. Big oil bailing out these companies would alleviate a great deal of pressure on congress to create more regulations if big oil were to be the hero and take care of this mess. How badly could it hurt for big oil to move into the manufacturing of the very products that are responsible for consuming big oil’s main product? It is not as though these products are unrelated.

The advantages to the consumer:

They could buy or lease the automobile at a substantial discount, which would depend upon their average fuel consumption.

They could lock in a price range on fuel, knowing they won't have to drive all over town looking for the cheapest gas station. If stations in some markets are charging them more than the percentage over the agreed profit margin in the contract, the difference could be credited to their account so it would average out. No matter where they go in the country, as long as they buy their gasoline from the Exxon supplied or owned station, they will not have to pay attention to which station is selling for the lowest price in that market.

I used the example of Exxon & GM but the same could work with Chevron, Shell or BP with Ford and Chrysler. The big oil companies have “economies of scale” so they could make it work, make it profitable, make the combined proposition of buying a car and fueling the car significantly less expensive for the consumer – and they could do it more effectively than the scheme of any prodigal congressmen could ever fathom.

Somebody - is going to bail them out. Better the private sector than the government, because if the government does the bailing, they're going to take it out of "big oil" anyway. Big oil might as well OWN it if they're going to pay for it and pay they will with Democrats in power.

QUICK SUMMARY

By bundling into transportation packages, everyone can benefit.

Benefits to Oil Companies:
Lock in contracts / Sell more oil / create brand loyalty
Diversify and hedge themselves by owning automotive companies, which are not correlated to the same cycles as oil prices.

Benefits to Consumers:
Ability to obtain transportation at substantial discounts.
Negotiate gas price ranges for life of contract
Save time and hassle of searching for best price

Benefit to Automotive companies:
Better capitalization and ability to compete in the world market.
Make them more competitiveSave jobs
Save Pension

More from MrArbitrage at www.TableofWisdom.com