Low Oil Prices Help Some, Not All, Manufacturing Segments

In 2014, oil prices dropped 30% between the end of June and the end of November. The MAPI Foundation, the research arm of the Manufacturers Alliance for Productivity and Innovation (MAPI), says the price will keep going down and stay low for a few more years to come. U.S. oil production is soaring and OPEC is not slowing production, which is flooding the market and pushing down petroleum prices. Although supply is up, however, demand is not following. U.S. oil consumption has held steady since 2008 and the U.S. Energy Administration predicts it will decline at an annual average rate of 0.1% all the way into 2040. Americans are becoming energy conscious.

How will the oil price drop affect the manufacturing sector? The MAPI Foundation came out with its 2015 and 2016 manufacturing forecasts in mid-December with some ideas. While manufacturing as a whole will grow around 3.5% next year, two industries will show the most marked change — the motor vehicle sector and the oil drilling equipment market.

Lower gas prices are saving consumers an estimated $750 per household that they can spend on a wide range of goods that manufacturers produce. The most visible effect will be in the auto industry. Not only will consumers buy more cars, they are expected to spend more on extras for each car they buy. The MAPI forecast says motor vehicles and parts production will grow 5% in 2015, although it will slow down to 4% in 2016 and level off at 1% in 2017. There are also signs that Americans will indulge their love of trucks and SUVs. In the three months ending in October 2014 compared to the same period in 2013, production of light trucks and utility vehicles went up 8%, while automobile production actually went down 1%.

Industry has been fueling the motor vehicle industry too. Heavy truck production rose a whopping 17% in the three months ending 2014 compared to the year before, and truck trailers grew even more — 25%. While these dramatic gains won’t continue, MAPI says 2015 will be a good year, with growth of 9%. But, production is going to slow down to 2% in 2016, then drop 3% in 2017.

It’s another story in the mining and drilling equipment segment. Lower prices and less revenue will cause companies to hold off on finding new sources of oil, and will use equipment as long as possible. MAPI expects mining and drilling equipment production to go down 6% in 2015 and as much as 24% in 2016, with a bit of a rebound to 13% in 2017.

Still, matters could be worse for this segment. The MAPI forecast excludes some possible scenarios. If countries like Russia and China follow the U.S. in exploiting shale reserves, prices may be even lower. Equipment manufacturers will have a bit of a cushion, however, if exports to such countries offset stagnation in the U.S. On the other hand, oil production could be strangled if unrest and political instability in the Middle East and Africa suddenly intensifies.

As we drive to work, we can expect to continue to see prices at the pump lower than we’ve seen for years. As consumers, we like driving at a lower cost per mile. And if we’re in the auto industry, we like it even more.

Karen Wilhelm has worked in the manufacturing industry for 25 years, and blogs at Lean Reflections, which has been named as one of the top ten lean blogs on the web.

Some opinions expressed in this article may be those of a contributing author and not necessarily Gray Construction.