• 25 mins London Stock Exchange Boss Defends Push To Win Aramco IPO
  • 2 hours Rosneft Signs $400M Deal With Kurdistan
  • 4 hours Kinder Morgan Warns About Trans Mountain Delays
  • 10 hours India, China, U.S., Complain Of Venezuelan Crude Oil Quality Issues
  • 15 hours Kurdish Kirkuk-Ceyhan Crude Oil Flows Plunge To 225,000 Bpd
  • 19 hours Russia, Saudis Team Up To Boost Fracking Tech
  • 1 day Conflicting News Spurs Doubt On Aramco IPO
  • 1 day Exxon Starts Production At New Refinery In Texas
  • 1 day Iraq Asks BP To Redevelop Kirkuk Oil Fields
  • 2 days Oil Prices Rise After U.S. API Reports Strong Crude Inventory Draw
  • 2 days Oil Gains Spur Growth In Canada’s Oil Cities
  • 2 days China To Take 5% Of Rosneft’s Output In New Deal
  • 2 days UAE Oil Giant Seeks Partnership For Possible IPO
  • 2 days Planting Trees Could Cut Emissions As Much As Quitting Oil
  • 2 days VW Fails To Secure Critical Commodity For EVs
  • 2 days Enbridge Pipeline Expansion Finally Approved
  • 2 days Iraqi Forces Seize Control Of North Oil Co Fields In Kirkuk
  • 2 days OPEC Oil Deal Compliance Falls To 86%
  • 3 days U.S. Oil Production To Increase in November As Rig Count Falls
  • 3 days Gazprom Neft Unhappy With OPEC-Russia Production Cut Deal
  • 3 days Disputed Venezuelan Vote Could Lead To More Sanctions, Clashes
  • 3 days EU Urges U.S. Congress To Protect Iran Nuclear Deal
  • 3 days Oil Rig Explosion In Louisiana Leaves 7 Injured, 1 Still Missing
  • 3 days Aramco Says No Plans To Shelve IPO
  • 6 days Trump Passes Iran Nuclear Deal Back to Congress
  • 6 days Texas Shutters More Coal-Fired Plants
  • 6 days Oil Trading Firm Expects Unprecedented U.S. Crude Exports
  • 6 days UK’s FCA Met With Aramco Prior To Proposing Listing Rule Change
  • 6 days Chevron Quits Australian Deepwater Oil Exploration
  • 6 days Europe Braces For End Of Iran Nuclear Deal
  • 7 days Renewable Energy Startup Powering Native American Protest Camp
  • 7 days Husky Energy Set To Restart Pipeline
  • 7 days Russia, Morocco Sign String Of Energy And Military Deals
  • 7 days Norway Looks To Cut Some Of Its Generous Tax Breaks For EVs
  • 7 days China Set To Continue Crude Oil Buying Spree, IEA Says
  • 7 days India Needs Help To Boost Oil Production
  • 7 days Shell Buys One Of Europe’s Largest EV Charging Networks
  • 7 days Oil Throwback: BP Is Bringing Back The Amoco Brand
  • 7 days Libyan Oil Output Covers 25% Of 2017 Budget Needs
  • 7 days District Judge Rules Dakota Access Can Continue Operating
Alt Text

The Next Big Digital Disruption In Energy

Blockchain technology is transforming the…

Alt Text

Is OPEC Considering Deeper Output Cuts?

You could argue OPEC and…

Alt Text

Why U.S. Crude Exports Are Booming

U.S. crude oil exports are…

Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

More Info

Why VW Is “Too Big To Fail”

Why VW Is “Too Big To Fail”

The phrase “Too Big To Fail” came about during the Financial Crisis of 2008 to describe banks bailed out by the U.S. government after they were deemed systematically important during a crisis. While the recession of 2008 has long since ended, a new kind of Too Big To Fail maybe emerging.

Volkswagen disclosed recently that some of its diesel cars cheated on emissions tests using a sophisticated piece of software to artificially lower emissions. That admission of environmental guilt has created a firestorm that has already brought down VW’s CEO and caused massive damage to its reputation. Yet for all the talk about VW’s actions and the duplicity involved, there has been little evidence that the firm will face a financial cost that could imperil its future. Unlike BP after the Deepwater Horizon spill, Volkswagen has not been hit with the immediate torrent of costs that BP was. As a result, VW’s stock is only about 25 percent below where it was before news of the scandal hit. For an event of this magnitude, a 25 percent fall in price is not bad. Related: Forget Vegas, Nevada Is Now About Reno And Lithium

By some estimates, VW may have to pay the U.S. about $18 billion in fines, whereas BP, by contrast, ended up facing costs in excess of $50 billion. Volkswagen is being helped by two factors: First, there is far less of a tradition of class action lawsuits in Europe (where most VW diesels are sold) meaning the firm will face significantly lower penalties from courts. And second, VW in particular and diesels in general are critical to European life today.

Diesel fuel engines generally get better mileage but have greater levels of air contaminants compared with gasoline engines. In Europe, where fuel prices can be $7 a gallon for gas or more, fuel economy is often regarded as more important than pollutant levels. As a result, the number of diesel cars on the road has grown markedly in the last 25 years. In Western Europe, the share of diesel cars on the road has grown from just under 14 percent in 1990 to more than 53 percent for the full year 2014. In countries like France and Spain, nearly two-thirds of cars are diesels made by a variety of companies from VW to Renault. Related: Iran May Not Be That Attractive To Oil Industry After All

Diesels are so important to the lifestyle of so many Europeans that in response to a suggestion from a member of the French Green Party, Segolene Royal, the French environment and energy minister was recently quoted saying “Ban Diesels? You can’t be serious… we can’t treat problems of this gravity with ideological slogans at the expense of French interests.” As long as Europe’s vast market for diesels remains secure, VW is going to remain an entrenched and necessary part of the economic fabric of life. Related: Next Few Weeks Will Reveal Full Extent Of Oil Industry Suffering

In addition, Volkswagen is truly too big to fail in industrial Germany. Indeed, as a recent Businessweek story revealed, VW has long been such an important factor in the German economy that the company received special attention and treatment from the government. The German state where Volkswagen is headquartered, Lower Saxony, owns 20 percent of the overall VW company. It is inconceivable then that the German government would penalize the firm so heavily as to permanently cripple it given that doing so would hurt the State’s own economic interests.

None of this means that VW’s recovery will be easy, fast, or swift. Lawsuits will likely drag on for years and the German government may end up taking even firmer control over VW when all is said and done. But given Germany’s economic importance in Europe and the global economy, and given VW’s importance to Germany, the company as a whole is not going anywhere. And for that matter, nor are the increasingly ubiquitous European “clean” diesels.

By Michael McDonald of Oilprice.com

More Top Reads From Oilprice.com:

Back to homepage

Leave a comment

Leave a comment

Oilprice - The No. 1 Source for Oil & Energy News