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What Falling Oil Prices Mean for High-Tech

Crude oil prices have fallen more than 20 percent in the last month as fears have persisted about several segments of the global economy. The Wall Street Journal reports that the decline continued Monday in Asian trading, and Jim Ritterbusch, an analyst at Ritterbusch & Associates, told the paper that he would not attempt “to pick a bottom to this price collapse.”

He was being smart. The global economy is getting hammered on several fronts, and this is being reflected in lower crude oil prices, which historically (absent of geopolitical factors) tend to foretell the relative strength of key economies by several months. In Europe, several countries continue to sink deeper into an economic quagmire that is threatening the euro's viability. China's manufacturing sector has slowed slightly in recent weeks. In the United States, the “jobless recovery” and persistent worries in the financial sector have combined to depress the equity market. Last Friday, the Dow Jones industrial average plummeted 275 points to erase all gains made this year.

The situation holds deep challenges for tech manufacturers. Continuing worries about stubbornly high unemployment rates could make buyers skittish during the important holiday buying season. Furthermore, corporate IT spending could be squeezed if enterprises unsure of growth trends clamp down on equipment purchases and hold the line on hiring.

The bad news has some silver linings, though. The same foggy economic environment holds promise for enterprising technology companies. Inflation remains muted, and component pricing will likely remain stable for a while longer, giving high-tech manufacturers better visibility into supply conditions. Companies providing suites of productivity enhancement tools and software applications tend to perform better during periods of slow growth as managers try to leverage available resources to boost profitability. Falling oil prices could also be beneficial to logistics companies and other transporters, which may pass on gains from lower costs to customers, including technology equipment makers.

In the past, many technology companies have seized the opportunities of slower growth to enhance research and development activities in anticipation of being well positioned for the rebound. Deep-pocketed semiconductor companies like {complink 2657|Intel Corp.} are renowned for increasing capital expenditures during market contractions. They leverage their cash advantage to gain competitive advantages and push farther away from rivals.

Consumers may also get a breather from falling oil prices. After months of paying what some American consumers consider sky-high prices for gasoline, the downward pricing trend in crude oil delivery just ahead of the summer driving season may encourage more families to hit the road more often and for longer trips. Some of the extra savings may go into buying a tablet or an e-reader for that long road trip.

9 comments on “What Falling Oil Prices Mean for High-Tech

  1. Barbara Jorgensen
    June 4, 2012

    I definitely see consumers benefiting from lower gas prices, but a more important measure will be what freight and shipping companies do. For example, will airlines get rid of their $25 baggage fees? Will freight companies reduce their prices? I doubt it very much but I hope I am pleasantly surprised. With the exception of consumables (energy, groceries) it takes a long time to see an extended benefit from lower oil prices–if ever.

  2. bolaji ojo
    June 4, 2012

    I'd like airlines to get rid of the $25 luggage fee too. It's unlikely they will, though. As you noted, lower fuel prices could benefit the industry more in the transportation sector where it could reduce costs for truckers who ship finished goods to retailers and components the last mile to assembly plants. What are the other potential benefits? Pricing isn't going up anytime soon so that could make for better planning. That's about it. Strong growth will come when job growth comes back and employers scramble to fill positions.

  3. bolaji ojo
    June 4, 2012

    A recent poll on EBN indicated many respondents were expecting the second half to be an improvement on the first half. If your conclusion is correct that lower crude oil is pointing to economic slowdown, manufacturers may have to explore ways of keeping demand for their products up.

  4. _hm
    June 4, 2012

    Gas price of $80 a barrel is good price. Anything above it is speculation. So falling gas price has not much to do with high-tech. 

  5. Anna Young
    June 5, 2012

    Barbara I agree. I don't foresee airlines extending this generosity towards baggages handling fees either. Historically, companies don't usually pass on this gains immediately However, we might over some time (as you said) for example benefit from a reduction in flight tickets, lower costs from logistics and other transporter companies. We'll see.

  6. Anna Young
    June 5, 2012

    _hm, Gas prices does have an impact on the direction of technology, research and development. For example, concerns surrounding the  of research  technologies such as Solar power, Wind power, hybrid cars and hydrogen fuel cells is largely due to increase in oil prices. Hence, higher fuel prices lead to a reduction in this kind of economic activity. I also think that a fall in oil prices will provide the high tech manufacturers the necesary tools for a better visibility into supply activities. What's your thoughts?

  7. Anna Young
    June 5, 2012

    Bolaji, as you know, in any economy, the large portion of the economic activity is dictated by consumption, the overall demand for goods and services. Consumers would be able to spend more on other activity if the price of oil stays low. Therefore I would imagine now that manufacturers will seek ways to keep the demand of their products up. I think that makes perfect sense

  8. mfbertozzi
    June 5, 2012

    Interesting article, as usual from you, Anna; I am wondering why tech is still strong impacted by oil. No to say it should be right to avoid any correlation, but the fact is alternatives for limiting oil's impact on the market, considering all segments, are still away (speaking for myself).

  9. _hm
    June 6, 2012

    I look it differerntly. The gas price effect last for very short time – few days to few weeks. But for litlle longer time over few months, people forgets it and it does not effect really.

     

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