High Cost of Cheap Gas

By Lloyd Graff

Are you happy about the price of gas falling below $2 per gallon? You probably should not be. You should feel angry and scared, unless you drive 150,000 miles a year or make mostly automotive gear. If you live in the rest of the machining world a sinking feeling should accompany the sinking price of petrol and natural gas.

We are in a severe commodities recession now and may be headed toward a deflating commodities depression. The price drop has been caused by several factors and currently shows little sign of reversing. The biggest reason is China’s slowdown in manufacturing. Ok, you’re no fan of the Beijing Bandits, but they fueled the commodities boom of recent years and now they are taking us down with their waning appetite for goods.

China’s leaders are desperately trying to guide their economy to a soft landing as they move away from an economy based on manufacturing to one more weighted toward tech and services. This is an extremely difficult task, and they may not be successful in making a stress free de-emphasis from making things, what they have done for 30 years.

Virtually every commodity related to making things, including food like corn and wheat, has been murdered over the last year. Oil is the poster child, affected by slack demand. Saudi Arabia’s willingness to allow oil’s price to fall by not curtailing its production is partially because it fears Iran is taking its market share. U.S. production has rebounded with fracking, which has brought forth major new production in North Dakota, Texas, Ohio and Pennsylvania. Natural gas is killing coal in the U.S. for power, yet prices continue to sink even as it is used more, because of conservation and mild weather.

Metals like copper and nickel are falling with slack Chinese demand. They are setting multi-year lows almost daily. Speculators are doing what speculators do, leaning on prices when they are dropping, thus exacerbating the fall. The dollar continues its strong rise against almost every world currency. The euro has fallen almost 30 percent from its peak and is near parity with the greenback. The Canadian dollar, which not long ago was worth more than the U.S. dollar, has fallen 30 percent. This is brutal for U.S. exports. It is tough on the machining world here.

The tractor market stinks, hydraulics are lousy, construction machinery is mediocre, oil and gas are ugly, mining is a disaster. This is a lot of bad news for our machining world.

So automotive is thriving with cheap gas, cheap financing, and the world’s car makers here in North America are enjoying themselves with an 18 million unit year.

The Fed may raise interest rates a tad in December, but Janet Yellen has to be scared about a strengthening dollar, the possibility of a hard landing in China, a fiscal mess in Washington, and a declining participation rate in employment, which masks the huge unemployment rate for the poorly educated. The Wall Street bond players keep lobbying the Fed for higher rates. Bernanke and Yellen have resisted behind the scenes because of just what is happening now – the potential for a China and commodities double dip.

So are you reveling in that cheap gas at the Shell? If it gets much lower you may want to crawl into your shell.

On the positive side, Today’s Machining World’s spies tell us that Section 179 tax deductions for capital equipment may sneak in before Dec. 11. Congress is doing its usual dance before the Christmas break. I’m hoping for the best with the China-commodities headwinds. Make sure to call your local Congress Person to help get the bill passed!

Question: What is the best pickup truck on the market?

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11 thoughts on “High Cost of Cheap Gas

  1. Jason Zenger

    What about Saudi Arabia not curtailing its production because of fears that higher prices will encourage more fracking and less dependence on them? I know several machining companies who have suffered from decreases in fracking related work.

  2. Seth Emerson

    Best Pick-up? For real work? Chevy=Ford=Dodge (All Diesels)

    For non-work (75% of the market) No longer being built! Chevy Avalanche!

    Hee Hee!

  3. Another canuck

    Cheap gas? Be thankful you don’t fill your tank up elsewhere on this planet. Here is what we pay in Vancouver. $1.25 (per litre) x 3.785 = $4.73 Cnd. per US Gallon. Divide that by 1.33 (US/Cnd exchange) and we are paying $3.56 USD per US Gallon. Many Europeans are paying over $2.00 (US) per litre.

  4. Steve

    Ford F150s our 2010 now has 252,000 miles on it delivery parts with an average payload of 1500lbs! add Timbren suspension springs ($350ish) and E rated tires.

  5. John Bressoud

    The automakers are enjoying a great year and housing construction is finally rebounding. But I see these as secondary markets that are fueled only by money in the pocket of the consumer. They are not able to sustain an economy the way that basic industry can.

    With housing prices rising, this feels a lot like 2006, 2007.

  6. Erik

    I’d rather pay $4/gallon and have a robust economy. If we had a congress with a brain, they would take this opportunity to slap an infrastructure tax on that cheap gas and start improving our 3rd world quality roads and bridges. That infrastructure initiative would spur the economy on equipment sales and supporting business.

    But that won’t happen, they can’t stop bickering long enough to do anything intelligent.

    The falling price of corn may be an even greater issue. Talk about a snowball effect. Al lot of chatter out there about this being the downslope on the 20 year Ag cycle. If that’s remotely accurate, that’s all kinds of bad for Machine Shops.

    Best Pickup? Pick one. They’re all pretty darn good. I am trying to figure that out right now for a camper tow vehicle. An embarrassment of choices….

  7. John Rogers

    My 2005 Silverado Z71 4WD now had 135K-new brakes and tires at 70K-ready for brakes and rotors now. The 5.3 engine seems bulletproof. Speedometer took a crap and a way overpriced piece of Bakalite between the fan motor and switch went bad and that’s it for 10 years. Know so many guys with older Silverado’s at 250K-still strong.
    Would like to buy a new one but the sticker price is killer.

  8. allen

    A Chinese “hard landing” has a lot more serious possibilities then a quarter of the world’s population on the unemployment lines.

    A good deal of what’s keeping China from fracturing is the promise that next year will be better then this year. The corruption of the Communist government’s tolerable if your income’s going up. But take that promise away and all bets are off.

    There are still plenty of Chinese who remember the Great Leap Forward and the heaps of emaciated bodies that resulted from pulling a big chunk of the rural labor force off the fields, and the resulting weak harvests, to babysit zillions of backyard blast furnaces that weren’t anywhere near efficient enough to compete with industrial scale equivalents.

    Between the geezers who were there to see how bad things can get and the kids who’ve never known anything but the relative prosperity that’s resulted from trade liberalization the Chinese leadership’s hemmed in.

    If civil disorder ignites then it has to be contained but if there’s too much and too enthusiastic “containing” then China’s looking at civil war. Say goodbye in weeks to progress that took decades to attain.

    As for Saudi Arabia, their concern isn’t losing market share so much as it’s losing their heads.

    Iran would love to topple the Saudi government and one way Saudi Arabia can ham string Iran is by keeping oil prices low. That strategy also, at least in the short to medium term, cools competition from fracking. In the longer term however it just means that newer, more-efficient frackign techniques have to be developed.

    Fracking’s a way to make money, that’s established. Now it just needs a buff to make it pay in a world of cheaper crude.

  9. Big Al

    I’ve had a Dodge and liked it. I now have a Honda and love it. It’s a little smaller and fits in my garage better, has a gate that opens like a normal truck or like a door and has a trunk in the bed. It rides much nicer and if you don’t need a truck for construction of other heavy work, it’s great.

  10. Bryan Smith

    Low gas prices have helped a lot of people balance their house hold budget. Pay raises being eaten up by ever rising health insurance costs. Oil and gas have always been cyclic. I certainly understand the frustration in not having the surge last longer. But high gas prices are NOT the utopian cure all many wish for.

    Chevy, Ford or Dodge all make a good truck.


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