Low Oil Prices Challenge US Manufacturers

Low Oil Prices Challenge US Manufacturers

Jan 16, 2015

By Sarah A. Webster, Manufacturing Engineering

A few years back, the US Energy Information Administration predicted that the US would achieve energy self-sufficiency in two decades. Thanks largely to hydraulic fracturing, or “fracking,” the US was fast on its way to becoming the world’s top producer of petroleum and natural gas hydrocarbons.
If only that game-changing prediction came with a playbook.

The surge in supply has caused the price of crude oil to fall by more than half since June. Prices were under $50 a barrel as of press time and headed for $40. A Saudi prince told USA today that we’ll never see $100-a-barrel oil again. And OPEC has no apparent plans to back off production, which would lift prices.

The national average price of gas, meanwhile, has fallen for more than 100 days, to $2.13 per gallon, as of Jan. 12, according to the AAA Fuel Gauge Report.

But what’s great for consumers, and even for giving the economy some extra pocket-change lift, isn’t necessarily good news for manufacturers – especially those who make parts for the oil and gas industry or cars and trucks.

Let’s start with manufacturers who make oil and gas parts. Until the near-collapse in prices, oil and gas manufacturers had been buzzing about the boom, making pipes, pumps and other oil field parts just about as fast as they could. But at these prices?

While fracking lacks the risk of exploratory drilling – we know where the shale is – it is still expensive to pump. Fracking projects start to lose economic sense below $80-90 a barrel. What’s more, a lot of banks backed these projects based on the collateral of the underlying oil, valued at some $80 a barrel.

If this price drop is temporary, the oil and gas industry can have a good laugh in a few weeks and keep drilling and pumping. But if not?

“At a certain price, we will see how many shale oil production companies run out of business. … This will render many new projects economically unfeasible,” Saudi billionaire businessman Prince Alwaleed bin Talal told USA Today, according to a Jan. 11 article.

And the potential damage for US manufacturers doesn’t end there.

If low prices are sustained and continue falling, they could also derail progress in the US auto industry, where manufacturers are facing tough mandates to improve their Corporate Average Fuel Economy.

At the 2015 North American International Auto Show this week, Chevrolet showed off a Bolt concept car that gets 20-plus miles of electric range, and the Ford F-150, which features a lightweight aluminum body, won Truck of the Year.

But at these prices, are consumers going to pay for these fuel-efficient models – and support the billions of dollars in R&D and manufacturing investments going on behind the scenes to pay for them?

We already know the answer to this, of course, because consumers are quite predictable. In December, as gas prices kept falling, year-over-year SUV, truck and van sales were up 10%. Car sales were weak. And sales of hybrids and electric models, such as the Toyota Prius, Chevrolet Volt and Ford C-Max, were left wanting.

If this trend continues, you can bet that some automakers will be pushing to roll back CAFÉ rules, or, framed another way, fighting for the rules to more accurately reflect consumer demand. Ford CEO Mark Fields already told WardsAuto that although Ford is on track to hit the 54.5 mpg requirement in 2025, he predicted that the midterm review of CAFÉ regulations set for 2017 would be very “data-driven.”

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