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Dropping oil prices and metal fabricating

A newspaper reporter called me earlier this week wanting to know how the drop in oil prices has affected metal fabricating members of the Fabricators & Manufacturers Association. In all honesty, I didn’t have much of a concrete response.

Like most people in the U.S., I’m excited about the falling prices at the pump. (Considering that, according to The Washington Post, 2008, 2011, 2012, and 2013 were the four years with the highest average crude oil prices since the 1860s, oil prices were probably going to retreat at least a bit.) It may not be enough of an economic savings to boost overall GDP in the U.S., but gas prices below $2 per gallon definitely have put consumers in a much more optimistic mood.

But what do the falling prices mean for metal fabricators? (The price of the international benchmark crude fell to below $48 a barrel in London on Monday, Jan. 12, a huge drop from the $109-a-barrel, fourth-quarter forecast issued in the summer of 2014.) If it hasn’t affected orders right now, it eventually will. Work from oil and gas projects probably will slow down, but will this slowdown bring down metal fabricators?

I actually think metal fabricators are in a good position. A lot of these projects for the energy-related industries are large ones, and they take several weeks to fabricate. Work being done now is likely to be for orders placed several weeks or even months earlier.

Layoffs are starting to occur at those companies closer to the point where the material is extracted from the ground. As with any long-term uptick in business, people think less about the inevitable downturn and are completely dumbfounded that the gravy train has come to a stop—at least temporarily.

Even with the downward pressure on pricing, the U.S. Energy Information Administration expects crude oil production in the U.S. to average 9.3 million barrels per day. That’s somewhat less than earlier estimates, but it’s still an increase of 700,000 barrels a day from 2014. Lower drilling costs and improvements in extraction technology are helping several operations stay in the business of production.

Economists suggest it will take some time for production to react to prices today. New production is still coming online, but long-term exposure to lower prices may ultimately put the brakes on some of this development. Economists predict prices will start to climb again, but this may not occur until 2016.

leaves metal fabricators with the knowledge that they may not be able to expect the same level of economic activity from this sector in 2015. For those in Texas, North Dakota, and western Canada, that may prove to be a very big hit. Those outside of those geographic areas that count oil and gas as only one market segment that they serve may be better off. Diversification is a shop’s best friend.

The collapse of oil pricing will not result in the collapse of the U.S. oil industry, but it will be a retrenchment. It was going to happen sooner or later; Saudia Arabia just happened to be the entity that sped up the inevitable.

About the Author
The Fabricator

Dan Davis

Editor-in-Chief

2135 Point Blvd.

Elgin, IL 60123

815-227-8281

Dan Davis is editor-in-chief of The Fabricator, the industry's most widely circulated metal fabricating magazine, and its sister publications, The Tube & Pipe Journal and The Welder. He has been with the publications since April 2002.