In the first two articles of this series on low oil prices, we explored the causes and effects of the situation as well as its impact on regional oil production. But what about manufacturing? Experts in this area differ widely in their opinions about it, and no wonder–cheap oil has a broad range of economic effects. Lower oil prices usually help consumers, but manufacturers can take a hit—especially in industries like steel which heavily manufacture products for the oil production industry. At the same time, benefits for consumers often end up benefitting manufacturers as well, as savings on oil-related products translate into increased spending elsewhere. Increased consumer spending can help manufacturers in many different fields, as well as spurring economic growth. So, what is the overall impact on manufacturing?
In the short term, many US manufacturers are nervous about the effects of plunging oil prices. The main concern is about the energy sector, specifically whether companies will end up postponing or canceling new drilling projects. The steel industry relies on drilling rigs to purchase steel pipes and tubes to be used for oil exploration. The recent downturn has caused a decrease in new orders. While many in the industry fear the potential of serious losses, the overall mood seems to be uncertain. Whether and when drilling operations increase will depend largely on the price of oil in the coming months.
On the other hand, lower oil prices bring undeniable economic benefits to certain sectors. One example is the automotive industry. Consumers have more money to spend when oil prices are lower, including for big ticket items like new vehicles. If oil prices stay low, people have historically used their savings to purchase new automobiles, including less fuel-efficient models such as SUVs. The amount of money saved on motor fuel alone has been significant. Lundberg Survey Inc. has estimated that Americans saved nearly $14 billion dollars in 2014 on fuel when compared with the previous year. These savings have increased spending in other areas as well, including home buying, which directly impacts the construction industry. Lower energy bills can also help manufacturers save money in their production and day-to-day operations.
Of course, the million dollar question here (and actually, it is worth a great deal more than that) is will oil prices stay low? Or will they increase again soon? This is what everyone wishes to know, and what nobody can predict. Certain money managers (for Motley Fool, for instance) believe that the current low prices for oil are an overreaction and an opportunity to reap long-term rewards with investments. It seems inevitable that oil prices will rise again eventually. And whatever slowdowns occur, it doesn’t change the fact that places like the Permian Basin are filled with untapped reserves of oil.
Sometime in the future, demand for oil will increase, and production will boom once more. Even the most seasoned experts don’t know when, but many believe that a change will come sooner rather than later. As Michael Levi, a member of the Council on Foreign Relations, said in a recent NPR interview: “…it’s very difficult to anticipate where things are going to go. The only thing I would predict with some confidence is that they won’t be where they are today for much longer.”