Cheap Chindian Cars and High Priced Oil Don't Mix

The rising cost of crude has been attributed to rising world demand and dwindling supply. 'Peak Oil Theory' is debated at family dinner tables and water coolers throughout America. CNBC hosts a parade of analysts who speak in detail on how growing demand in China and India are eating up supply. I wonder and question the health and longevity of this reality.

A growing middle class in India and China are singled out as the largest growing consumer segment of gasoline worldwide. It also happens that it is in China and India where you can find the world's cheapest cars. The highly anticipated Nano, known as the "People's Car", from India's Tata Motors (TTM), is the world's cheapest automobile starting at just $2,500.00 and China boasts a $5,000.00 car from Chery Automobiles sold only in China. Why do the world's cheapest cars come from the two countries with fastest "growing middle class"? Why doesn't this growing middle class go out and buy a shiny new BMW or Mercedes?

Middle class in India is considered to be anyone with a yearly salary of over $2,000. Yes, that is in dollars not rupees (by the way it's around 87,000 Indian Rupees) and yes, that is a calendar year, not a week or a month. In China, according to the China State Information Center, a yearly salary over $6,300 (about 43,000 Chinese Yuans) is considered middle class. I guess that explains the higher price of the Chery - if people can afford it they will pay for it.

The middle class in China and India are looking for and buying the cheapest car that they can get their hands on. The entire price tag on the Nano or the Chery is less than a down payment on most American cars. Consider finance payments for a car loan that is more than your yearly salary and then add rising gasoline prices. What percent of income will go to fuel costs? Can anyone reasonably expect demand to continue to grow in these countries at the current pace if oil prices continue to rise?

In the U.S. we complain about high fuel prices but most Americans can actually afford their cars and can, grudgingly, afford higher gas prices. Ultimately, the percent of our salary that goes to fuel is still relatively low. If prices get high enough you may drive less but you are still going to drive. The same cannot be said for China and India. Demand has already pulled back in the U.S. and as fuel costs rise, expect to see a larger proportionate decrease in demand in the countries that have been touted as its largest consumers.

source:seekingalpha