February 2015, Vol. 70, No. 2
Editor's Log
Energy Struggles Present Other Market Benefits
By now, virtually all of us have refilled our gas tanks and felt a certain level of exhilaration as the bill was almost half of what it was a year ago.
In parts of the Southwest, prices have fallen below $2 – unheard of just a few months ago.
Contractors too have been ecstatic when it comes to paying their fuel bills as that amount is radically discounted. It essentially becomes an unexpected bonus as most projects currently underway were bid with higher fuel prices factored in. Substantially cheaper prices means an improvement of the bottom line and in some cases, turning marginally profitable jobs into substantial earnings.
Fuel oil customers in the Northeast and Midwest are also celebrating. Manufacturers are relishing cheaper production costs just as their plants are beginning to ramp back up.
All in all, money should begin to flow a little freer as personal spending is poised to rise and a tepid economy recovery could actually begin to finally manifest itself after almost six years of languishing in financial purgatory. Of course, politicians’ will tell us that it has been their stellar decision-making matrix that has navigating the difficult economic currents for the past several years. Of course, all this solid, just-in-time-for-the-holidays good news may be short-lived. Real concerns remain as to whether or not the U.S. economy along with other key world markets, are capable of sustaining a long-term economic recovery with cheap oil prices. For the past several years, it was an aggressive energy market that kept the U.S. economy afloat through this challenging period, but that’s another story (see January column).
Still, the effects of cheaper prices and economy forward movement is made possible as the world has become awash in oil from a variety of sources, not just U.S. shale production. Maintaining the abundance of oil – even in the cheaper price scenario – can to a large degree be attributed to Saudi Arabia. That Middle East Kingdom is committed to maintaining OPEC’s market share (and relevance) and that means keeping OPEC production at 30 million bpd. This is the line in sand for OPEC, the Saudis claim, and production will not be reduced.
But even the powerful Saudi economy is suffering as the result of lower prices and less income. Indeed, the kingdom is losing money at current prices – by some projections they will have a deficit this year of $50 – $60 billion. The nature of Saudi Arabia’s oil culture and subsequent benefits are now showing signs of erosion and faltering support among the kingdom. Speculation is that the Saudis will blink and come off their hard stance immediately if the price of oil approaches $40 per barrel as that would make their economic losses untenable.
There are reliable projections that the oil freefall will bottom out in the first quarter of 2015 and a slow rebound will bring prices back up to a range of $70-72 for the remainder of 2015. While that price is lower than many in energy would like to see, it should allow most companies to remain profitable and keep energy work active (albeit at a subdued level compared to recent years). Yet, at that price, fuel prices remain relatively low and the economic recovery sustainable.
The silver lining for the underground construction and rehabilitation market is two-fold. An improving economy helps the natural gas market as demand from both manufacturers and new residential developments will increase demand for the abundant gas resources shale drilling has produced. With gas prices expected to remain in the $3-5 range for the next five years, combined with the diminishing reliance on coal, gas should thrive as the most economical, reliable, efficient and environmentally friendly source for power generation in the U.S.
With reasonable economic growth comes at least some relief from the incessant budget crises for cities across America. With municipalities’ cash positions improving, that should bring some relief to the extreme underground infrastructure issues that are plaguing most cities. Of course, it’s going to take one heck of an economic boost combined with a reformed mindset by city governments to fully address the sewer/water infrastructure crisis. But baby steps forward are a reasonable – and hopeful – start.
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