At first glance, reduced oil prices appear to have a positive impact on the economy, and specifically, on the manufacturing industry. However, by taking a closer look, it’s not always the case. There are clear “winners” and “losers.”
Manufacturers need to understand that oil prices absolutely do have an impact. The impact oil prices have on a manufacturing company is largely determined by these factors:
1. What the company produces
When oil prices plunge, the prices of oil-based products including raw materials, plastics, and every molded product is also reduced. The decrease in energy costs results in lower production costs and less expensive oil means less expensive transport. Consumers have more money to spend, which translates to growth and an increase in the bottom line.
However, just as decreasing oil prices have caused opportunities, it has also caused threats. Namely, to suppliers of equipment (such as steel pipes, valves, earthmovers, pumps, other heavy equipment, etc.) to energy companies. Just one example is U.S. Steel Corporation plant in Lorain, Ohio. In January 2015, the company told International Business Times that it will lay off 614 workers at the facility and about 140 more people at a plant in Texas as plunging crude oil prices reduce demand for certain steel products.
2. Location
While Texas has become more diversified, its manufacturers are still very vulnerable to declining oil prices. Michael Levi, the senior fellow of energy at the Council on Foreign Relations and author of the book “The Power Surge: Energy, Opportunity And The Battle For America’s Future” said that several states including Texas, Oklahoma, Wyoming, and North Dakota will probably lose on average from falling oil prices. There is also the trickle-down factor.
For example, a Fitch Ratings report estimated that Texas home prices are more than 10 percent overvalued and will likely decline due to falling oil prices, which affects the manufactured housing industry. It’s reported that in northern North Dakota, new housing project have been shelved and local businesses shuttered as oil workers disappear from the scene.
While lower oil prices may negatively impact those in certain sectors, economists agree that the large picture remains positive. In a Wall Street Journal article, Don Norman, director of economic studies at the MAPI Foundation, a manufacturing research group in Arlington, Va., said, “Overall it’s a positive. Manufacturers benefit because of lower prices, including lower shipping costs. And consumers spending less on gas and heating oil means they’ll be out shopping.”
As you can see, oil prices do have an impact on manufacturers. It is a good idea for these companies to understand exactly how this could be so they can plan for it.