BY JOE TASCHLER AND THOMAS CONTENT
Milwaukee Journal Sentinel (TNS)
MILWAUKEE – The pain at the pump is gone for now, but could we begin to feel it elsewhere?
From manufacturers who make parts and equipment for U.S. oil drillers to companies developing battery and biofuel technologies, the monthslong slide in the price of oil has implications for companies across the U.S.
This could quickly become about more than cheap gasoline.
The concern is that crude prices could fall so low, demand for alternative energy sources would evaporate and the growth of the U.S. oil patch, which has helped lead the country back from one of its worst-ever economic downturns, might slow or even stop.
“This is clearly a mixed bag for the U.S. because a large percentage of U.S. job growth since the credit crisis has happened in the energy sector, and that growth could halt or reverse if oil prices stay low for long,” said Ethan Bellamy, managing director and chief oil industry analyst at Milwaukee-based Robert W. Baird & Co.
Jobs in the oil and gas extraction category have grown by an estimated 80 percent in the past 10 years, according to the U.S. Department of Labor.
That growth has reached places like Richfield, Wis., where Strohwig Industries decided five years ago to jump into the business of manufacturing oil field parts and equipment.
“It has become a significant part of what we do,” said Mike Retzer, controller at Strohwig.
For Retzer, falling oil prices complicate financial forecasting and planning for the coming year.
“We haven’t seen a decrease in orders yet, but heck, we don’t know,” Retzer said. “The crystal ball is pretty cloudy due to these oil and (natural) gas prices.”
At Busch Precision Inc. in Milwaukee, President and Chief Executive Mike Mallwitz said part of his manufacturing company’s strategy for 2015 is to increase its business in the U.S. energy sector.
Falling crude oil prices will not dissuade him from pursuing that line of business. Even with the steep price drop, opportunities remain in the oil patch, he said, and if history is any indication, oil prices will eventually go back up. “We feel we have a place in that industry, bottom line.”
The price of a barrel of U.S. benchmark light sweet crude fell more than $2 a barrel to $57.81 on Friday last week. It was trading at $107.26 a barrel in late June.
How low does the price have to go before it begins to diminish the profitability – and production – of the U.S. oil patch?
“There’s really no magic number where things are going to fall off a cliff as far as production is concerned,” said Jim Ritterbusch, president of Ritterbusch & Associates, an oil advisory firm in Chicago. But, “we’re getting close.”
Ritterbusch adjusted his price forecast last week, saying oil could fall below $50 a barrel before year’s end.
“There are some energy companies that have really been hurt,” he said. “There are going to be some smaller producers that will struggle to survive.”
PLANNING FOR VOLATILITY
Companies in the petroleum sector plan for volatility, said Lee Edwards, chief executive of Virent Inc. in Madison, Wis., and a former executive at BP in Houston.
“It’ll go up, it’ll go down, and we’re trying to build our business models so we are independent of that volatility,” he said.
Renewable energy’s feedstocks also can have volatile price swings, Edwards said, noting the price of corn, the primary ingredient in ethanol, has fallen from more than $8 in August 2012 to below $3.50 this fall.
“For us and many in the biorenewable space, we have to look at the volatility of crude oil relative to the volatility of the feedstocks we’re converting,” he said.
Virent is a spinout from the University of Wisconsin-Madison. The company is attempting to commercialize the processes that produce a plant-based substitute for transportation fuels and chemicals that are now derived from oil.
The bioenergy firm uses “Virent is replacing crude oil” in its branding, but doing so is no easy task, especially when crude approaches $55 a barrel.
The company shifted its emphasis in recent years to renewable chemicals from renewable fuels, although it’s still pursuing both.
“It’s a lot easier to get interest in this space when crude oil is over $100,” Edwards said.
Virent said it has expanded its lineup of renewable chemicals used to make products sourced from petroleum – everything from foam in car seats to polyester in clothing to components of wall insulation.
Despite any difficulties plummeting crude oil prices may pose for some companies, the ever-growing savings at the gasoline pump translate into a sizable boost for the U.S. economy.
The lower gasoline prices act like a tax cut.
“The average consumer is clearly winning here on lower prices and money in their pockets,” Baird’s Bellamy said.
The low oil prices, though, are putting pressure on shares of publicly traded companies that are pushing alternatives to petroleum. The more gasoline prices fall, the harder it is for consumers to justify the premium price they’d have to pay for electric cars or hybrid-electric cars.
So far this year, auto sales are up 6 percent, led by sales of pickup and sport utility vehicles. Sales of trucks typically rise as gas prices fall. Of 10 vehicle segments, just two are down from 2013 – one of them being hybrid electric vehicles, according to data from Ward’s Automotive and Baird.
While sales of electric vehicles and hybrids are likely to be pressured by low oil prices, development of alternative energy sources will continue amid tougher greenhouse gas and pollution standards being adopted around the world.
“So even if the fuel prices stay low, the emissions regulations continue to get more and more stringent,” said MaryAnn Wright, vice president of engineering and product development for the battery business of Johnson Controls in Glendale, Wis.
Johnson Controls is working on developing lithium next-generation car batteries to help automakers meet those standards, but its focus for now is helping the auto industry get better mileage out of cars with internal combustion engines.
“We did not see the price of oil at this level,” Wright said, but the company’s mantra in recent years still has been that there are “a lot of technology advances that we could do that will drive emissions reductions without having to go all the way to electric vehicles.”
So what’s a fair price for a barrel of oil – a price that doesn’t gouge consumers yet allows the U.S. oil patch to continue growing?
That’s impossible to figure, Bellamy said.
“What’s fair isn’t relevant when you are dealing with a cartel,” he said, referring to OPEC. “I wouldn’t be surprised if they cut their production deeply at the next meeting, taking oil back to $70 or if they allowed oil to go to $40 per barrel.
“Those are equally likely in my view.”
Ritterbusch expects a production cut from OPEC in which it will seek to raise prices. “I believe during the first quarter they will call ‘uncle,’” he said.