The negativists see 8% unemployment, home foreclosures, Spain in free-fall, a Socialist winning in France, an Obama second term, and $4 gasoline. Plenty to moan about, but U.S. machining companies see an economic honey pot. Why?
Autos (not so much pickups) are still selling despite gas prices. This indicates that car purchases are more related to economic optimism than the price of gas.
Why do we have $4 gas? It is not lack of supply that hurts, because we have a glut of oil in North America. It just isn’t in the right place at the moment. The East Coast refineries get oil from Venezuela, the Gulf, the Middle East, and some domestic. They adjust prices according to the Brent crude price, which is $20 higher than the Nymex price. The lack of pipeline capacity from the Canadian Tar Sands and North Dakota’s huge new fields cannot easily go East because we lack pipeline capacity. Supply now overwhelms capacity to transport to Houston’s big refineries. Add the slow move to natural gas as a transportation fuel. It will happen eventually, not now.
Iran is the other wild card. Gasoline demand in the U.S. fell 7% last year, an enormous drop, but prices were bid up because of the fear of an interruption from the Mideast. Ironically, Iranian oil is not that important in itself. It’s the “what if” that pushes the futures market. A wounded or empowered Iran might move on the Saudi fields, which would make a mess.
But business in the U.S. is still humming and the immense new supply of natural gas makes for an interesting cross current. Cheap natural gas is killing coal as power plants switch over. The railroads, which carry so much Montana coal to the East and Midwest, are short of cargo now.
But chemical companies are in expansion mode because cheap natural gas feed stock from America means big profits for a long time. They are already lobbying against the export of gas as LNG (liquid natural gas) to China or elsewhere for fear it would raise the domestic price of natural gas.
I see several opportunities for machining firms from this situation. The conversion to natural gas for transportation will happen over the next five years, especially for trucks – big new market. New chemical plants and natural gas turbines mean a lot of fab and machining here. Stainless steel fittings and valves will be in demand.
We are also in the midst of a big replacement cycle for airplanes, and gas guzzling old cars. Add in China’s loss of advantage because of high energy costs and rising wages, and India’s inability to compete in world manufacturing, and you can see why American industrial firms like GE and Caterpillar are expanding in the United States now.
It’s a good time to be in manufacturing here. It’s about time.
Question: At what price point for gasoline would you change your driving habits or vehicle?