Last month I briefly discussed how low crude prices benefit Asian markets the most because they tend to be net importers of oil and petroleum. On top of that, a large portion of the population in these countries spends a significant amount of their weekly income on gas—in the case of India, as much as 30 percent. The biggest winners, then, are Asian countries such as India, Philippines, Thailand and Indonesia.
China, the world’s largest net importer of oil, second only to the entire continent of Europe, also benefits. For every dollar that the price of oil drops, its economy saves about $2 billion annually. Even though it just signed a multibillion-dollar, multiyear gas supply deal with Russia, China plans on tapping into its own shale gas resources, estimated to be the largest in the world.
One notable exception to the Asian market is Singapore. Although the city-state is a net importer of crude, bringing in around 1.3 million barrels a day, it depends heavily on oil exports to grow its economy. According to Bloomberg, in fact, Singapore ranks second in the world for a reliance on crude, based on a change in oil exports as a percentage of GDP from 1993 to 2018. Only Libya’s economy is more dependent.
Because the United States continues to be a net importer of crude and petroleum—it imports around 6.5 million barrels a day, according to CLSA—it has benefited as well, but its dependence on foreign oil is falling fast.
In the chart below you can see how breakeven prices increase as both global oil demand grows and the geological formation requires more sophisticated—and expensive—extraction methods.
Which Industries and Companies Have Benefited?
To answer this question, Strategic International Securities Research (SISR) ran a correlation coefficient between the retail price of gas and 72 global industry classification standard (GICS) sectors, focusing on the years 2000 through 2014. Below are the top three sectors that ended up benefiting the most from falling gas prices. They all have a negative correlation coefficient, meaning that their performance has historically gone in the opposite direction as the price of gas, similar to a seesaw.
What this data shows is that the U.S. manufacturing industry has regained the cost benefit advantage to Chinese manufacturers. It’s becoming more and more attractive to build and create here in the U.S., because the cost of energy is relatively low.
Leading the list is automakers, suggesting that when gas prices have dropped, consumers have felt more confident purchasing new cars and trucks. Today consumers are even returning to vehicles that are known to guzzle rather than sip gas, such as SUVs, pickup trucks and crossovers. Ford’s F-Series continues to blow away its competition. Since mid-October, General Motors has delivered 7%, Ford 11% and Tesla 12%.
It makes sense that airlines would perform better, since fuel is typically their largest single expenditure. In 2012, when the average price of a barrel of oil was $110, fuel accounted for 30% of airlines’ annual operating costs. Low fuel costs are cited as the main reason why Virgin America, which went public last week, reported third-quarter profits of $41.6 million, an increase of 24% year-over-year. The NYSE Arca Airline Index has flown up 110% since the beginning of 2013, hitting 13-year highs, and Morgan Stanley recently took a bullish position toward airline stocks, showing that company balance sheets are “structurally sound enough to make ‘events’ in the next five years unlikely” and that the industry as a whole is now growth-oriented.
It also makes sense that aluminum would benefit, given that the metal requires a notoriously large amount of energy to produce.