Price plunge Oil: The Accidental Stimulus

The sharp drop in global oil prices is acting like a gigantic tax cut for major industrial economies such as Germany, and could boost average corporate profits by up to 3 percent. But the aviation, auto and shipping industries are benefiting most.
Oil prices have more than halved since October.

Russian President Vladimir Putin has said the decline in world oil prices is doing even greater damage to his economy than the Western sanctions imposed over the Ukraine conflict. That’s no surprise because as a major oil exporter, Russia is bound to suffer.

It’s very different for Germany and other industrial nations where the flood of cheap oil is acting as a veritable economic stimulus program benefiting consumers and companies alike.

Consumers are saving cash on heating and fuel. The resulting rise in disposable incomes is benefiting retailers and consumer goods manufacturers. It’s difficult to quantify the positive impact because no one knows what proportion of the oil-related savings is flowing back into the economy.

Investment banks estimate that in the U.S., a drop in fuel costs by just one cent boosts the disposable income of the nation’s 322 million inhabitants by €1 billion ($1 billion). The head of asset manager Blackrock, Laurence Fink, recently described the oil price decline as a “massive tax cut” for the world.

Companies save money on the oil or oil-based products they purchase. Their profit margins increase so that they have more money available for investments. And if they pass on part of their savings, consumers also benefit.

Overall, due to the oil price effect, we’re expecting additional demand of more than 600,000 cars in 2016. Report, Center for Automotive Research, University of Duisburg-Essen

“In purely mathematical terms a decline in the oil price by a quarter versus the last half-year should boost the economy and yield around a quarter percentage point more growth,” said Jörg Krämer, the chief economist of Commerzbank.

Goldman Sachs recently calculated that an oil price drop by 10 percent increases corporate profits by 1 percent on average. That includes the earnings of companies such as Deutsche Telekom and business software giant SAP that aren’t dependent on oil.

If this calculation is correct, then earnings should rise by an additional 3 percent after the global oil price in 2015 fell by around 30 percent from 2014. At present, oil costs 38 percent less than it did 12 months ago.

The biggest beneficiary is the aviation industry, where budget airlines such as Ireland’s Ryanair save around a third of their operating costs due to lower kerosene prices.

At Lufthansa, the percentage saved is a bit less because it has higher labor and administrative overheads, but even Germany’s national carrier is saving a three-digit-million-euro sum each quarter. Investors have responded by bidding up Lufthansa’s share price by 40 percent since September.

Quelle: Reuters
Lufthansa is enjoying a sharp drop in fuel prices.
(Source: Reuters)

 

In 2015, Lufthansa’s fuel bill fell to around €5.7 billion from €6.7 billion due mainly to lower oil prices but also to reduced fuel consumption because the airline flew 25 fewer aircraft last year.

A few days ago, the airline presented its forecast for its 2016 fuel bill to bankers in New York, telling them it expects its kerosene bill to fall by €800 million to €4.9 billion.

The positive impact will likely increase for Lufthansa and other airlines as hedging contracts expire — such contracts typically run for up to two years and as no one expected oil to get this cheap, the contracts were based on higher oil prices than currently available in the market.

Auto companies and logistics firms are also profiting. “Overall, due to the oil price effect, we’re expecting additional demand of more than 600,000 cars in 2016,” the Center for Automotive Research at the University of Duisburg-Essen said in a study, referring to global demand. It predicts worldwide sales of 78.6 million cars in 2016 — without the oil price effect, sales would be 78 million, it said.

In Germany, car demand is being driven by the lowest costs in six years for gasoline and diesel prices. The main beneficiaries aren’t premium manufacturers like Audi or BMW, but lower-price producers where customers are more likely to be swayed by the fuel savings.

However, the cheap fuel is also prompting automakers to roll out more sport utility vehicles because their higher consumption, although bad for the environment, has become less significant in cost terms.

Large SUVs and pick-ups are on abundant display at the Detroit Motor Show which opened Monday. It’s bad news for efforts to boost sales of battery-powered and hybrid cars, which remain too expensive to make significant inroads into the mass market.

But premium automakers need to watch out because added sales of the gas-guzzling giants will increase the average CO2 emissions of their fleets and could confront them with billions of euros in penalties if they exceed legal CO2 limits.

Quelle: Reuters
Sales of SUVs are on the up worldwide as a result of falling oil prices.
(Source: Reuters)

 

The oil price cut enabled Germany’s biggest shipping line, Hapag-Lloyd, to go public last November. The company has been back in profit for the last three quarters and the rise in earnings is solely due to the drop in ship diesel prices which saved it some €600 million in the first nine months of 2015. Without that boost, Hapag-Lloyd would have continued to post losses and would have struggled to find investors.

On the downside, railway operator Deutsche Bahn is one of the losers of the oil price trend because cheap diesel is deterring customers from transporting goods by rail. And in passenger transport, cars and long-distance coaches are becoming more competitive compared to trains.

One might expect the chemical sector to be among the main winners because oil is its most important raw material for making petrochemical products and plastics.

But intense competition is forcing chemical firms to pass on all the savings to their customers, according to the VCI German chemical industry association.

That’s evident in the high price falls the sector has been complaining about for months: Chemicals prices fell 2.5 percent last year which led to German chemicals revenues stagnating at €190 billion. Many contracts stipulate that declines in raw materials must be passed on to customers.

That’s a major factor for Cologne-based chemicals group Lanxess. “We’re hardly benefiting from the cheap oil,” said a spokesman. At industry leader BASF, the price drop is having the added impact of weakening earnings in its oil and gas operations.

 

Ulf Sommer reports for Handelsblatt on companies and financial markets. To contact the author: [email protected]