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January 15, 2015 01:00 AM

Low oil prices will spur growth

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    Plastics News

    Just a few days into 2015 and already I have the pleasure of writing about a trend that is setting up to have a huge effect on the U.S. economy and the plastics industry this year. As I write this, the price of crude oil is trading below $50 per barrel and falling fast.

    The last time the price of oil was this low was 2009. But the economic environment at the start of 2015 is much different than it was six years ago.

    At that time, the financial markets were in meltdown, the housing sector collapsed, and the U.S. was suffering through the most severe economic recession since the Great Depression. U.S. demand for crude oil looked shaky at best, so prices were only around $40 per barrel at the beginning of 2009. By the end of the year, the recession ended and the outlook improved moderately. GDP growth in the U.S. crept up to a lackluster 2 percent, and oil prices were touching $80 per barrel. Over the next four years, economic growth stabilized at close to 2 percent per year, and during much of this time the price of crude oil traded in a range between $90 and $110 per barrel.

    Because markets have a tendency for solving problems, something else exciting happened during this time. Large reserves of hard-to-extract crude oil and natural gas that had been discovered in North America a few years earlier were now worth developing since crude oil prices were trading at or above $100 per barrel. An American energy boom ensued.

    A large number of people were hired, and a substantial amount of money was invested in capital equipment. And while many of the other sectors of the U.S. economy were growing slowly during 2010 to 2013, the energy sector was driving economic expansion en route to the long-wished-for-goal of energy independence for America.

    Last year at this time, many analysts, including myself, believed that when the rate of growth in the U.S. economy ultimately accelerated from the lackluster pace of 2 percent per year, the price of crude oil would then go even higher. It takes energy to fuel economic growth, and if it cost $100 per barrel of crude oil to fuel a growth rate in U.S. GDP of around 2 percent, then it would surely cost more to achieve the desirable growth rate of closer to 3 percent.

    But that is not what is happening. Economic growth in the U.S. has averaged well above 3 percent for the past three quarters, yet the price of crude oil has dropped by more than 50 percent since June of last year. The stock market has dipped because the stock prices for all of the large energy companies and many of the major capital equipment suppliers are falling.

    The domestic oil producing companies are releasing statements that they cannot operate profitably with oil prices this low. Capital investment in the U.S. is slowing, and there is talk of pending large-scale layoffs in the oil fields.

    All of this uncertainty in the U.S. market is compounded by the uncertainty in the rest of the world. Most of Europe is mired in a recession and the pace of growth in the Chinese economy is slowing, so there now appears to be a glut of oil on the global market. Rumors abound that Saudi Arabia is responding to this imbalance between supply and demand by keeping production levels high in an attempt to drive U.S. competitors out of the market. Furthermore, Russia and Iraq are rumored to be raising their output levels because of a desperate need for cash.

    So what does all of this mean for the U.S. economy in general and the plastics industry in particular for 2015? It is my opinion that the turmoil and anxiety we are currently experiencing will be short-lived, and will soon be replaced by a period of accelerating economic expansion. The domestic energy companies will have to endure some pain in the near-term, but they represent a small fraction of the overall U.S. economy.

    With lower energy prices expected for this year, the vast majority of American consumers will enjoy a substantial increase in their disposable incomes and confidence levels. Most domestic manufacturers will experience lower production and delivery costs. And plastics processors hit the trifecta because they will get the benefits of increased demand, lower operating and delivery prices, plus lower prices for resins.

    Resin prices have historically had a close relationship with the price of crude oil. The trend in resin prices has been rising steadily since 2009, and they were at record-high levels for most of 2014. But I expect them to decline in response to the drop in oil prices. I am not ready to forecast a drop of 50 percent just yet, but the average price for resins this year should be well below what it was in 2014.

    There could be other benefits as well. The European economies will definitely benefit from lower energy costs as they struggle to emerge from the current recession, and stronger economic growth in Europe should produce stronger growth in U.S. exports to that region. Lower energy prices will also suppress the rate of inflation in the U.S., and this will give the Fed greater flexibility in its decisions concerning monetary policy. The pressure on the Fed to change its current policy is mounting, and the cases on both sides of the argument are complicated. But overall it is much happier with a lower rate of inflation than a higher rate.

    This current period of rapidly falling oil prices will be transitory. I do not know for sure when or where the price will hit bottom, but I will be surprised if the price is lower at the end of this year than it is right now.

    I will also be surprised if the price gets back up to $100 a barrel this year. So that is my latest forecast for oil prices in 2015 — higher than they are right at this moment, but not as high as they were before the plunge. All in all this is good news, and I encourage you to enjoy it while it lasts.

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