Insights for Tube, Pipe, and Profile Manufacturers – Issue 3

Russian Sanctions Will Provide Opportunities

It’s impossible to make an omelet without breaking a few eggs, and it’s impossible to sanction a major energy producer without breaking the status quo. In 2022, that supplier is Russia. The supplies are energy commodities in three forms: Natural gas, crude petroleum, and refined petroleum products. Russia is a heavyweight in the energy market because it’s the world’s third-largest petroleum producer and second-largest natural gas producer. It is the heavyweight in the European market for natural gas, supplying about 40 percent of Europe’s demand. According to the International Energy Agency, Russia exports 5 million barrels of crude oil and condensates per day and 2.85 million barrels of refined petroleum products per day.

The entire world’s output of crude oil is expected to be about 100 million barrels per day in 2022. So, the computation here is simple: If the world as a whole were to sanction Russian oil, this action would reduce the world’s supply 7.85 percent. That might not sound too bad, but consider taking a 7.85 percent pay cut. That’s bad. Russian sanctions will provide opportunities for other energy commodities suppliers.

Could U.S. producers contribute more to the world’s output to help compensate for the potential shortfall? Sure. As of June, the U.S. was producing 11.8 million barrels per day. At the peak, early in 2020, the U.S. was producing 13.3 million barrels per day. That’s 1.5 million barrels right there, and Saudi Arabia and a few others could certainly pump up their output to make up to replace the rest. However, given that West Texas Intermediate was north of $90 per barrel in late August, they don’t have much incentive to do so. The current regulatory burden and the green movement’s vilification of the fossil fuel industry likewise discourage oil companies from making new investments these days.

But all this assumes that the world is suffering from a shortfall, which isn’t necessarily the case. Many oil industry experts and analysts think that Russia continues to export just as much as it did before the talk of sanctions started. The country might be settling for below-market prices, but it has been reported that Russia ships more to its political allies (or at least neutral customers) in the Far East, and a few in the Middle East, to make up for lost customers. It might not be earning as much as before, but the nation is still raking in a lot of revenue.

Russia’s European customers intend to get by without Russian energy. They don’t see any sense in funding a war in their backyard. But even if they don’t cut off Russia entirely, eventually Russia’s dominance in this market might falter anyway. International energy service companies Halliburton, Baker Hughes, and Schlumberger are in the process of exiting the Russian market in compliance with domestic and international sanctions. Such moves will leave a partial expertise vacuum that will take quite a bit of time to fill. And, if enough governments were to institute restrictions or bans on exporting oilfield equipment to Russia, its domestic oil companies would be desperate for repair parts and replacement items before long.

Ultimately, Russian sanctions will provide opportunities, especially right here at home. Eventually the international petroleum market will settle down into a new equilibrium. If Russia ends up with a smaller slice of the pie, this will be good news for the world’s largest oil producer, including domestic companies that make oil-and-gas-related tube and pipe products.

A Long-term Trend in Durable Goods Manufacturing

A look at 30 years of data from the U.S. Census Bureau reveals a clear-cut trend in durable goods manufacturing.

First, new orders. The monthly tally increased 92 percent in just eight years, from February 1992 to June 2000 ($114.5 billion per month to $219.7 billion per month). After that, it moved up and down for years; by 2018, it was $245 billion. It took off after the pandemic, and as of June 2022, it hit $273 billion. See Figure 1.

Sources: U.S. Census Bureau, National Bureau of Economic Research

The interesting story is in the value of unfilled orders. In the 1990s, manufacturers were able to whittle down the backlog. Unfilled orders grew from February 1992 to June 2000, but only by 15 percent. How? Technology undoubtedly played an important role, but employment played a critical role as well. After the recession of the early 1990s, manufacturing employed 16.7 million. Employment increased throughout the rest of the decade, and by the end of the 1990s, it reached 17.6 million. That’s not a vast upswing, but it was more than enough to allow manufacturers to outpace the rate of new orders.

Recessions always hit manufacturing harder than other sectors. Manufacturers enter recessions first, emerge last, and shed proportionally more employees than companies in the service sector. So while the recession of the early 2000s lasted just 9 months, manufacturing employment shrank from December 2000 (17.2 million) to September 2003 (14.3 million) and didn’t recover. As the next few years went by, the dollar value of unfilled orders doubled from $500 billion to $1,000 billion. See Figure 2.

Sources: U.S. Census Bureau, National Bureau of Economic Research, Bureau of Labor Statistics

Employment in manufacturing dropped again during the Great Recession. It grew slowly after that, but the dollar value of unfilled orders again shot up, this time nearly 50 percent, from $800 billion to $1,200 billion. Note that the value of new orders didn’t change significantly during this time.

This trend concerns more than merely the number of people in manufacturing. A related factor is the cumulative experience in the manufacturing sector. Retirements remove the most experienced employees from the workforce, and this trend gathered momentum recently. The first of the Baby Boomers, born in 1946, reached retirement age 65 years later, in 2011.

Unless and until society shifts its focus away from university education and puts a greater effort into vocational and technical programs, manufacturers can expect more of the same.