Making It In The USA

Aug. 2, 2008
Hundreds of conversations over the last several months have revealed an amazing resiliency in America’s business sector, along with a “we will find a way through this” attitude regarding a host of economic issues.

But that does not mean that oil prices are not a concern to most people in America today. First, oil prices in general.

The United States is much maligned for being the world’s largest consumer of oil and for being wasteful because of the personal vehicles we choose to drive. But it’s worth noting that the United States was, in fact, one of the relative good guys in the world in 2007, and that the trend is likely improving in 2008. In 2007, we increased supply while holding demand essentially flat—and recent figures show a decline in gasoline consumption in the United States in 2008!

U.S. position good

World Supply for 2007 was 84.6 million barrels per day, virtually unchanged from 2006, while demand increased to 85.4 million barrels per day. Demand exceeded supply by 760,000 barrels a day—is it really any wonder prices are going up? By the way, the United States added 140,000 barrels a day (net, supply and demand) to the world in 2007, even as the global picture remained flat.

New oil field discoveries off the coast of Brazil and in Canada will not come on line for years, and thus, they provide hope for the longer-term future, but do not provide relief for the near term. For the short-term, what we expect is that private industry around the world, with and without government supports, will push into new technologies aimed at more efficient power generation and personal transportation. Today’s higher oil prices will eventually lead to new industries and jobs related to those technologies. Let’s make sure the technologies are stamped, “Made in USA.”

Speculation is also playing a part in driving up oil prices, but it is impossible to determine how large that part is. Even a 20 percent premium for speculators leaves oil at roughly $116/barrel, which now sounds fairly benign, but in fact still constitutes a drain on consumer spending and thus economic growth. Prices will come down when speculators pull out, but we don’t see that happening this year.

Then there is the consumer. Filling up our vehicles has become a painful reminder of high oil prices. A look at Personal Consumption Expenditures shows that we spend 3.8 percent of our money on gas and oil (data through April). While that number no doubt went up some in May, it is highly unlikely that we have reached the more dangerous 6 percent to 7 percent level associated with earlier recessions. However, a combination of high prices at the pump and high heating bills this coming winter because of oil and natural gas prices could be a powerful and painful mix. This is consistent with our forecast of worsening consumer difficulties and recession in 2009. Buy ahead for this coming winter if you can.

We have not changed our outlook for 2009, and now is the time to prepare for the upcoming hard landing. There are definitive steps that any and every business can take to protect the bottom line and the company in general. First and foremost, remember that in any downturn, “Cash is king.” Every decision you make over the next two years should be in the context of, “What will this do to my cash position?” A strong cash position is essential for carrying on operations and for positioning the company for the inevitable recovery.

The need for a strong cash position is also a reminder to be nice to your banker. He or she is having a tough go of it and will appreciate your efforts to build a relationship, instead of using your banker as a doctor (someone you go to just when things go wrong).

Readers should also be looking to reallocate assets, and making efforts to move into new markets. Look at your equipment and service offering and then look vertically and horizontally to see what business opportunities you can pick.

Proper positioning now will make all the difference a year from now. The old adage is still true: “You can’t adjust the wind, but you can adjust the sails.”

Oil Supply                     2007 percentage change from 2006 (annual averages)

World                             -0.00 percent
OPEC                             -1.11 percent
USA                                1.80 percent
Former Soviet Union      3.70 percent

Oil Demand                 2007 percentage change from 2006 (annual averages)

World                             0.90 percent
Former Soviet Union     1.66 percent
USA                               0.05 percent (equal to 10,000 barrels a day)
China                             7.37 percent

Alan Beaulieu, [email protected], is Senior Analyst, an economist and a Principal with the Institute for Trend Research, in Concord, N.H. He invites your comments.