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The Price Of Oil

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The Price of Oil - How will it Influence the Construction Industry?

Written By Peter Lucking On 07-Aug-2015

An interview with Richard Vermeulen, Principal, Chief Estimator, and Lead Economist at Vermeulens, by Peter Lucking

Richard Vermeulen

How Will the Price of Oil Effect North America's Economy?

'When oil prices were rising we had cost push inflation, which put the squeeze on margins, and wages in construction.  Conversely with the cost pull deflation, contractors and labor will have opportunity to have bigger margins, and higher wages.  This will stimulate the economy as a whole, which is good news.

How do you believe the Fed will react?

'Macroeconomics come into play.  The Feds have inflation targets. With cost pull deflation  wages, and profits expand to take up the slack.  With a 3% inflation target the price of oil could take 1/2% out of that, which has to be made up by the rest of the economy.  It's expansionary, and that is the way the fed will respond to it.  It they see there is any general deflation going on as a result they will act to be simulative so that inflation targets stay intact. 

What does it mean regionally?

'You basically have oil producers, and oil consumers so that consumers will obviously benefit, those regional economies will have more room to grow and more available income for an improved standard of living.  For example I just went to Breckenridge and back and it cost $16.00 in gas, so now I have an extra $5 or $10 to spend on something else. 

In the oil producing regions it will put a damper on their growth.  So to the extent that those regional economies have an oil producing base, and it has to be oil so there is a distinction of other forms of energy like coal, gas, etc.

For example in Texas, where 10 - 11% of the economy is made up of oil, and gas production there could be 40% of that being gas.  The last time there was an extended price bust in the 80's it went hand in hand with the savings and loan crisis, throughout the southwest so housing got wiped out at the same time.  It was a great recession in a regional sense or for those economies. So would I see housing go bust or banking go bust regionally, no.  

So how will this affect the housing market in oil producing States like Colorado?

'It will slow down to the extent that those who no longer have a job or whatever percentage of the Colorado economy is made up of that industry.  But let me put it this way, the fed is not going to allow any kind of a regional banking crisis to put a damper on anything.  Even if those banks were as shaky as the savings and loan industry back in the early to mid 80's.

In effect what will happen the people working in oil, some of those 'A teams that were in construction and went to oil are now going to move back into construction elsewhere which means that the percentage efficiency of the construction will go up because they have moved back into construction so it will counter balance itself won't it? 

'All structural changes in the economy involve people moving from one sector to another, and that is what this might be.  So that leads to the next question of how long will this last?  I haven't gotten into the geo politics of what is going on right now but as opposed to the 1980's where a lot of the world was communist countries, the Soviet Union, China, South Asia, India, those were Socialist countries, their economies were dead, they weren't going anywhere.  So now there is a lot more room in the global economy to take up the slack, and provide a price floor just in terms of demand for oil producers.  Somewhat different than the 80's. 

One thing that is quite interesting that was suggested the last time around, with various oil prices and so on, is to put an import duty on oil.  That will have the effect of boosting prices say in the North American economy so that would dampen the stimulative effect to the economy but it would mean that the structural impact isn't as large so if it is just a temporary fact then you wouldn't have as much dislocation because the local producers would be able to continue.

It would be an interesting move on the part of the national governments in North America to say we're going to slap an import duty on this to protect our local producers so they don't get wiped out.  So when this price starts to rebound again we don't get hit with double and triple price shocks like what has happened in the past. 

When prices don't go down as much, people don't run out and buy SUV's as much, and then when global prices start to push back up you can pull away from that import duty because the local industry doesn't need that support.  Meanwhile, the local industry can continue on more or less business as usual.  They can certainly avoid being wiped out.

How will this affect the Labor Growth in oil producing states?

'If you look at the gross numbers for example in Texas, the last figures I saw including contract workers might be 400,000 or 500,000 primary production jobs.  Well even if that scales back you could lose 100,000 to 150,000 of jobs. Job growth alone for 2015 was projected to be triple that.  This will dampen growth, as opposed to an outright recession.

For the oil producing states it is significant but not necessarily a disaster.  For the rest of the country it is probably going to be very good because in the end more there will be more money in people's pockets?

'Yes, it depends on the duration of the decline in prices.  We will have a closer look at how long this decline might last, and will have a full forecast for the construction industry in our Quarterly Market Outlook coming out in February.

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