An oil-price collapse, its beneficiaries, and less inflation ahead
Many brokerages, banks, and economic-research firms publish periodic newsletters on economic trends. As a service to readers, and without endorsing any particular views, the Monitor presents excerpts from some of these newsletters.Skip to next paragraph
Subscribe Today to the Monitor
For the past three months, we have maintained that oil prices are not only likely to fall but are more likely to collapse than to decline sedately under OPEC control. Our reasoning has been as follows: Because the OPEC countries have such divergent interests, it is unlikely that they will be able to agree on a production-quota scheme that would be adhered to by any member. While some countries - notably Saudi Arabia, Kuwait, and the Emirates - have tiny populations and enormous oil reserves, others - especially Iran, Nigeria, and Indonesia - have large populations and smaller reserves. When it comes to limiting production and foregoing income, the latter nations believe that the Saudis and the other Gulf Arabs should make most - if not all - the sacrifices in terms of reducing production and foregoing income.
-Nakagama & Wallace Inc., New York
Aside from the obvious and immediate troubles of the oil exploration companies, it's hard to find industries that would not, on balance, benefit (from an oil price cut). The biggest winners among manufacturers would be the heaviest users of petroleum as feedstocks for their final products. These include producers of chemicals, plastics, paints, and fertilizers. Among the service industries, transportation - especially airlines and trucking - stand to gain the most. And then there are sectors that stands to benefit because they produce substitutes for less-energy-intensive goods. A case in point would be vinyl siding, the relative price of which should fall and give it an edge over clapboard in terms of market share.
-Citibank, New York
In addition to the expected favorable impact of declining energy prices, there is more good news on the inflation front. The underlying ''core'' rate of inflation - the long-term relationship between the cost of labor and capital - has been retreating for more than two years. The descent, which picked up speed in 1982, should continue this year as wage gains remain small and productivity rises. This deceleration in unit labor costs will put a lid on inflation, offsetting any price pressures that might result from the strengthening in economic activity.
-Manufacturers Hanover Trust, New York
The oil price cutting is, in the short run, clouding the picture for both gold and the dollar by tending to strengthen them. This was to be expected. Since we believe that the underlying trend of both gold and the dollar is down, investors should use any significant sell-off to add to positions. Since the current oil-pricing situation is so uncertain, we would recommend patience before any additional commitments are made. It is possible, although not probable, that a catastrophic price war could be unleashed as excess capacity among many producing countries is enormous, some very large producers are desperate for revenue and, as the price falls, greater output has to be sold.
-The Bank Credit Analyst, Montreal