Plunging oil prices in the U.S. have received a warm welcome from airlines, auto makers and farmers, but what are the risks to corporate America if the decline persists?
Crude oil prices have dropped about 25% in just over four months, hitting a three-year low of $77.19 a barrel on Tuesday on the New York Mercantile Exchange. On Friday, they nudged up to $78.65.
The plunge is causing pain in a U.S. oil patch that has expanded substantially in recent years, and figures to hurt manufacturers that supply the energy sector. But the oil slump also is shrinking fuel bills for transportation companies and for consumers, who are likely to spend at least some of the savings, giving a boost to the economy.
Perhaps the biggest direct beneficiary is the airline industry. Fuel is its No. 1 expense, costing U.S. carriers a combined $51 billion last year. Airlines for America, the industry’s leading trade group, estimates that every penny per gallon change up or down equates to $190 million in the U.S. industry’s annual fuel expense at current consumption rates.
Spot jet-fuel prices have slid about 16% from early September, which analysts said shaves about $5 billion off 2015 fuel-bill projections for the industry made before oil began its latest slide. In the near term, those savings “will go straight to the bottom line,” said Scott Kirby, president of American Airlines Group Inc., the largest U.S. carrier by traffic.
For similar reasons, express delivery companies FedEx Corp. and United Parcel Service Inc. stand to benefit, as does the trucking industry—which carries 69% of all U.S. freight tonnage. For them, lower fuel costs are helping offset higher wages stemming from a driver shortage.
The express delivery companies generally pass on fuel savings to customers, but not immediately—which means those savings can show up in their bottom lines. “Certainly if prices stay as low as they are, that would be a benefit for the fourth quarter,” UPS Chief Financial Officer Kurt Kuehn said in an interview last month.
Cheaper oil also benefits farmers, and not only because they spend less on tractor fuel. If lower gasoline prices encourage Americans to pump more into their vehicles, that could stimulate demand for ethanol, a fuel additive whose production is one of the biggest users of U.S. corn.
Low gasoline prices also help U.S. auto makers by emboldening consumers to buy more pickup trucks and sport utility vehicles, which generally yield higher profits than small cars. Sales of Detroit-brand large SUVs such as General Motors Co. ’s Chevrolet Suburban are up 16% so far this year, and sales of big pickups like Ford Motor Co. ’s F-150 rose 9.5% in October.
But an oil-price slump can cut both ways for U.S. industry.