2018 Oil Crash - The Potential Effect of Falling Oil Prices on Manufacturing
/The Positive & Negative Outcome of Lower Oil Prices to Consider
If you’ve been watching the news, you might have seen that Oil prices are taking a nose dive. WTI Crude is currently sitting at $56.75 at the time I’m writing this post, which is just barely a notch above the low point. This is a definite bear market for oil, and the slide has been steady for a few months now.
Some say that this is the low point, and others say that there will be one more nose dive before it’s over. Whatever the case, the effect is going to be the same, and it’s something that everyone needs to take note of. Now is the time to take into considerations the positive and potentially negative impact of this slide on the economic outlook for Missouri manufacturing.
Let’s start with the positive impact. The most obvious impact will be lower prices at the fuel pump. That means consumers will have more buying power, and it might spur strong retail sales, especially during the holiday season. Consumer spending could stay strong for several months as a result, so this will have a definite impact on those of you who are manufacturing end-user products. B2B manufacturing may not see a spike in sales, but it is possible.
Lower oil prices mean cheaper oil-based chemicals. Those of you in the manufacturing industry that depend heavily on solvents and other oil-based products will probably see a drop in supplier pricing. It might take a while to trickle down, but there will be an effect. So you can count on a little wiggle room in your supply budget soon.
Now let’s look at the down-side. The bear market can have several negative impacts on your bottom line that could offset the positive. So it’s worth considering for your short-term production planning.
When oil prices fall sharply, you would automatically think that automobile sales would spike. That’s not necessarily true. In the past, consumers actually sit on the sidelines and wait to see what the future holds before spending on new cars. Consumers might think, “do I buy that SUV, or should I play it safe and get the small hybrid?”
While we have such volatility in the price of oil, it’s hard for consumers to feel secure in making firm decisions on big ticket purchases like cars. People will often wait until gas prices stabilize before finalizing a new car sale. So if you are somewhere in the supply chain for automobile production, don’t bet the farm on a big increase in buying just because gas prices drop.
If you are exporting, you better do your homework. A drop like this in oil prices has an effect on the strength of the dollar. As oil price drops and the dollar strengthens in value, that’s good for everyone except the countries who are BUYING from the US. A stronger dollar means less buying power for US goods. It’s really a complex relationship. But watch out if you are involved in export trade, or gearing up to expand into trade.
The long-term negative potential impact of the oil price drop would be the economy as a whole. This could be an indication of an impending recession. Couple this with the stock market action, and it very well could be the start of a big slow down.
The bottom line is, you better plan for the worst. There could be a nice spike in demand the short run, but the prospect of an economic slowdown certainly is a possibility.
How has the oil bear market affected the numbers for your facility, if any? Have you considered these factors in your immediate or long-term operational plans? I’m looking forward to hearing your input, and encourage you all to share.
Carlton Flowers
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