Lower prices put cash in consumers’ hands. ‘It’s like getting a tax break of almost $2,000,’ says CSX Corp.s’ Clarence Gooden.Justin Sullivan/Getty Images
Slumping oil prices may be denting Canada's economy, but south of the border, the dramatic fall is being heralded as a positive force that's adding momentum to the business environment.
As the fourth-quarter earnings-reporting season gets under way, the bosses at some of the biggest financial and industrial firms in the United States insist that plunging oil prices will – on balance – be good for that country's economy.
Some companies, individuals, and even whole states will suffer, the executives acknowledge, but low gasoline prices are pumping huge amounts of extra cash into consumers' pockets, and that's a good thing.
"While lower oil prices have created volatility in financial markets, America as a whole is a net consumer of energy and American households will benefit from the decline in energy prices, which is positive for the U.S. economy," Wells Fargo & Co. chief executive officer John Stumpf declared on a conference call after his company's earnings release last week.
Still, he noted, "That's on average, because there's going to be some states that are impacted, some customers who are going to be impacted and some business is going to be impacted." However, "net-net, it's an opportunity," he said.
Only a handful of U.S. companies have reported their fourth-quarter profit picture, although several of the big financial institutions have done so in the past week or so.
At U.S. financial giant JPMorgan Chase & Co., CEO Jamie Dimon said the company might take some hits because of its exposure to commercial or consumer real estate in Dallas, Denver and Houston, where the oil-price slump hurts. But on the other hand, he said, "when you add $800 a year to the consumer's cash flow statement" it will show up more broadly as a boost in car sales and overall retail spending. "It's quite clear it helps consumers. It helps their credit broadly," he said.
For some companies, the slump in oil prices is almost entirely positive. At aluminum producer Alcoa Inc., for example, for every $10 a barrel the price of oil falls, pretax profit goes up by $40-million, CEO Klaus Kleinfeld told analysts last week on his company's earnings call.
That's because of lower transport costs, and the fact that the company has two oil-fired aluminum refineries – one in Suriname and another in Brazil – where costs will decline.
Mr. Kleinfeld acknowledged the drop in gasoline prices can diminish the fuel-cost savings of light cars and planes made with aluminum, but he expects demand for these vehicles to stay strong in any event.
Over all, the U.S. economy benefits from low oil prices because it is still a big importer of oil, said BMO Nesbitt Burns Inc. senior economist Robert Kavcic. "The benefits for consumers and for lower costs through the manufacturing chain are probably going to considerably outweigh the negatives in the oil sector itself," he said.
BMO projects that U.S. gross domestic product will grow 3.1 per cent this year, up from 2.4 per cent in 2014. Canada, by contrast, will see growth diminish to 2.1 per cent this year from 2.4 per cent in 2014, partly because of the economy's commodity focus.
Some U.S. companies directly tied to the oil patch are suffering. Oil-field service company Schlumberger Ltd., for instance, said Friday it will cut 9,000 jobs and slash costs.
But others, even if they have some ties to the oil sector, expressed few worries about the price drop. Clarence Gooden, chief sales and marketing officer at rail company CSX Corp. – which transports oil by rail – cited studies that suggest only 10 U.S. states have employment levels "directly impacted by the oil boom." At the same time, he said, sending crude by rail makes up less than 2 per cent of CSX's business, so the benefits of putting more money in consumers' pockets outweighs any downside.
"For the average U.S. person, it's like getting a tax break of almost $2,000 a year, so it puts a lot of dollars into the economy," Mr. Gooden said. "I think lower crude oil prices [are] very positive for our economy."
Bank of America CEO Brian Moynihan acknowledged that there is a "technical risk" to the oil-producing companies that are the bank's clients, but the benefits to the consumer – and thus the overall economy – are real and already apparent. "Even in the first week or so of January, we're seeing the benefit to the consumer very starkly in the year-over-year comparison," he said on a quarterly conference call. "You're actually seeing consumers spend the money they are getting," he said.
Still, Mr. Moynihan noted, if low oil prices persist, the benefits on the consumer side of the bank's business could be offset by problems that could develop in its commercial loan portfolio.
Canadian bank executives said last week that energy lending makes up only a small part of their portfolios, and they are not particularly concerned about credit risk.