By: Dan Adamski, Managing Director, JLL
For the first time in years, filling up isn’t getting us down.
Diesel prices sitting below $3 are welcomed by consumers, especially as the holidays arrive. In June of this year, gas prices reached $3.68. Now, they’re as low as $2.73, according to AAA. The drop in gas costs hit quickly, and its impact on multiple industries varies.
The Situation: Oil Prices Fall Worldwide
For the first time in five years, the price of one barrel has dipped below $70, which is down from more than $100 per barrel in the last five months. Causes for the drop in costs include:
- Excess supply and little slow down in production
- Drop in overall demand, due to slower economic growth in China and lower levels of oil consumption in Europe
- Strict fuel standards (good news for the environment) and a sharper focus on energy efficient practices
The biggest cause, however, is supply. There are three million more barrels a day in the global market now than there was in 2011. Combined with a new focus on sustainability and weaker demand, it’s no wonder that prices have decreased.
What It Means for Energy Companies
Energy producers and their subsidiaries will anxiously enter 2015. Next year’s forecast likely includes lower profit margins, high levels of debt, cutbacks on capital spending and reductions in headcount.
Large companies will likely need to decrease capital spending and put new development on hold. Smaller independent energy companies will suffer more significant setbacks. In turn, these companies will likely reconsider any new investments on the horizon in the New Year.
Cities with a high concentration of energy powerhouses, like Houston, Calgary, Fort Worth and Denver, have been enjoying significant growth in recent years, beating the U.S. office market. The landscape for 2015, however, will likely see these markets slow down as energy companies give up space and cut back on leasing. In other, less energy-centric cities (like Cleveland, Cincinnati, Columbus and Detroit), low gas prices will likely drive an increase in investment and spending.
The Impact on the U.S. Economy
While energy companies are concerned, outlooks are looking up for retailers, manufacturing companies and heavy oil users, like airlines. For example:
- The retail industry is already feeling the impact, with a 0.7 percent increase in sales during November, as compared to October.
- Another benefactor: the International Air Transport Association anticipates a 26 percent increase in profits during 2015.
- Manufacturers that use oil as a feedstock, such as chemical or consumer product companies, will benefit from similar savings, too.
For retail, it’s the largest increase the industry has seen in eight months. Low gas costs mean savings for consumers, which in turn, accelerate the U.S. economy.
The Big Picture and Commercial Real Estate
As demand weakens in the energy market, demand for its real estate will follow. JLL expects that landlords and developers in these areas will attempt to lock-in and maintain occupancy with their energy industry tenants. On the flip side, however, consistently low oil prices will energize demand in other markets on a greater scale, including retail, residential, industrial and office demand.
Job cuts in primary oil and gas production should have minimal impact on the U.S. economy overall. Recent job growth across industries, such as professional and business services, healthcare, retail, and finance, should help to balance out job loss in the energy sector.
Looking ahead, oil prices will likely be subdued for the entirety of 2015. Energy companies will be looking to save cash, creating new opportunities and open vacancies for other industries nationwide.
About the Author
As Managing Director in JLL’s Tenant Representation Group, Dan is responsible for all client requirements in Western Pennsylvania and West Virginia. He specializes in Tenant Representation. View Dan’s full bio to read up on his experience.