“Falling oil prices” is ruling the headlines nowadays, a paradigm shift from oil prices hovering around $100 per barrel for the past few years supported by surging global demand, particularly in China.
Oil prices have been falling due to the classic tale of supply-demand imbalance. New oil sources have contributed significantly to the global supply. In the United States, companies began using techniques like fracking and horizontal drilling to extract oil from shale formations.
In fact, Unites States is currently the world's biggest oil producer, overtaking Saudi Arabia and Russia. Moreover, resumption of significant Libyan production acted as a key factor in putting downward pressure on the prices.
Simultaneously, weak economic activities along with a shift to cheaper and cleaner alternatives have led to lower demand. Oil demand in Asia and Europe began to weaken particularly due to the slowdown witnessed in China and Germany.
Given the scenario, the onus was on OPEC (Organization of Petroleum Exporting Countries), the world's largest oil cartel which controls nearly 40% of the world market, to make an effort to cut back production in order to push prices back. However, at the much awaited meeting in Vienna in November, OPEC decided to maintain the current production output target of 30 million barrels a day. In reaction to this, oil prices went into free-fall and eventually hit a five-year low on Dec 16, dipping below $60 to $53.60 a barrel.
Since June, the price of crude oil has plunged more than 40% from over $100 a barrel to under $60. Not overlooking the fact that oil is a necessity, in every form, the next question that crops up is – what effect will this falling price have on other industries and the consumers?
Win-Win Situation for Plastic Companies
While falling oil prices have created mayhem for industries like energy, the plastic packaging industry is well positioned to capitalize on the situation. Falling oil prices will not only provide a cost tailwind but will also boost demand due to the increasing disposable income at the customer level.
Increased Disposable Income Means Higher Volumes
The macroeconomic environment has been challenging for the packaging industry in the past few years due to weak consumer spending. Moreover, economic uncertainty in the Eurozone and raw material and energy price inflation also had a negative impact on packaging producers.
Now, cheaper oil means lower gasoline prices, which have fallen to $2.47 per gallon, the lowest since 2009. The EIA (US Energy Information Administration) projects that the US drivers will spend about $550 less on gasoline in 2015 than in 2014, assuming prices stay low. This, along with an improving employment scenario, will lead to a positive turn in consumer spending patterns and consequently, packaging demand.
Lower Cost Will Translate to Increased Margins
