Low oil prices here and in the US have led to good times for the auto industry as a whole, with many OEMs reporting record sales numbers. Can the good times continue?

By Jeff Sanford

Toronto, Ontario -- November 17, 2015 -- Anecdotal evidence suggests that the collision repair industry is doing relatively well this fall of 2015, as is the rest of the auto industry. Sales of new cars are at record levels. The recent Scotiabank Global Auto report released last week said conditions were the best they have been in years in the industry.

And why would the industry not be doing well? The troubles of the Great Recession of 2008 are far behind. North Americans are driving more than they have in years as gasoline prices fall to the lowest price in a decade.

The AAA Monthly Gas Price Report was released last week. It found that in the US gasoline is selling for less than $2 per gallon in 41 states. Eight states have average prices below $2 per gallon. The national average price of gas recently was $2.20 per gallon. This is the lowest average for the day since 2004. The lower prices are fuelling the domestic American economy. Looking to our own country, drivers are also seeing savings at the pump. Gas prices currently hover around $1 a litre on average. Some provinces, such as Alberta, are paying less than that, while some provinces, such as BC and Quebec, are paying a bit more. It's a steep decline in prices from this time last year, when the average price of a litre of gasoline was about $1.30

With prices this low, drivers are in the US are spending $275 million less per day on gasoline compared to a year ago. This is a huge amount of money that isn't going to foreign governments like Saudi Arabia, Iran and Venezuela, but is instead money that is staying in the Americas and boosting the domestic economy. A similar story is playing out in Canada. Alberta is suffering as a result of the low price of oil, but the price at the pump is good for retail-consumer facing businesses. The number of average road miles driven is also directly correlated with the incidence of collisions. It's a pretty simple equation: low gas prices means more driving, and that in turn means more collisions. 

No wonder prices have fallen as far and as fast as they have. Demand for crude oil dropped as a result of the high prices. At the same time, a new flood of crude oil came onto the market. Over the past several years advanced hydro-fracking procedures have allowed tight shale oil reservoirs in the US to be tapped. These reservoirs were found long ago, but only now has the technology been developed to tap these resources. The new flow of crude has helped saturate markets.

As well, overseas, crude oil from the northern Kurdish part of Iraq has been coming online in greater amounts. Southern Iraq has also been producing more oil. Last week it was reported that almost twenty large tankers full of crude were reported to be lined up in the Gulf of Mexico waiting to unload at Texas refineries.

Some point out that the drilling frenzy in the shale beds in the US is already slowing as the price of oil has dropped. Just like extracting the oil from Alberta's oilsands, drilling into shale beds is very expensive. The most recent numbers on American production suggest that total US production has dropped by a couple hundred thousands barrels a month. If prices stay low, production could continue to drop. Reduced production could send oil prices up again. As the old oil industry saying has it, “the best cure for low oil prices is low oil prices.” But for the time being, the outlook seems to be that low prices are going to be the norm for some time. Sanctions against Iran are coming off, so more oil will come from that country. The Saud's have indicated they're aren't cutting production. There is a lot of oil flooding the market right now. The assumption that the price of crude oil would rise rapidly again by late 2015 doesn’t seem to be bearing fruit. The argument that the price of oil is going to remain low for longer seems to be a solid bet. And that suggests good times yet for the industry.

 

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