Lower Oil Prices and the Global Economy

Stock market investors are betting on central banks like the Federal Reserve sparking the global economy back to robust health through monetary policy. However, with interest rates already at zero for all practical purposes, the main weapon remaining in the Fed's arsenal is money printing through quantitative easing and other measures. And the effects of that medicine seems be less and less with every dose given.

But investors should not despair...right now, there is another force at work stimulating economic growth around the globe. What is it? Lower oil prices!

Since March alone, oil prices have declined by more than 30 percent, leaving consumers more spending power. The global benchmark for oil, Brent crude, has tumbled to its lowest level in over 18 months and is now trading below $90 a barrel. Quite a drop from its peak earlier this year at $128.40 per barrel. And that is thanks largely to Saudi Arabia boosting production earlier this year to a 30-year high in effort to help the global economy.

The drop in crude oil prices is a definite negative for investors in the oil patch though. Take a look at three of the large international oil companies – ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX) and BP PLC ADR (NYSE: BP). The stock prices of both Exxon and Chevron have fallen by about 5 percent while BP has tumbled by a double-digit percentage so far in 2012. And their share price is unlikely to rebound strongly in the near future.

The reason? Lower oil and gas prices means lower earnings for these companies. According to FactSet, ExxonMobil is expected to earn $8.09 a share in 2012 versus $8.37 in 2011, Chevron is forecast to earn $12.98 per share in 2012 against $13.28 in 2011, and BP is predicted to earn $6.26 per share in 2012 compared to $6.89 in 2011.

So oil companies look to be losers in 2012 thanks to low oil prices. But there will be winners too. These are the big oil consuming industries such as airline and trucking companies. There is some evidence already that, for example, airlines are benefiting. The airline industry trade group IATA (International Air Transport Association) has hinted that the drop in jet fuel costs has already saved airlines nearly $20 billion (out of a forecast annual $207 billion price tag) in their costs. More evidence of lower oil prices being a boost to earnings in these sectors may become apparent when these firms start reporting results from the April-June quarter in the weeks ahead.

The interesting thing occurring right now in the oil market, which is both good but scary, is the lack of hedging by large oil users like airlines despite the 30 percent drop in oil prices. One would think major users would want to lock in these lower prices. But they are not at the moment.

The chief financial officer at Southwest Airlines (NYSE: LUV) said earlier this year that the company's hedge protection for the second quarter of 2012 was “minimal”. And according to the Financial Times, an executive vice-president at FedEx. Michael Glenn, stated last week that “lower fuel prices will help [his company]”.

But the scary part is that this lack of hedging is eerily reminiscent of 2008 when these companies did not hedge their fuel costs in anticipation of even lower oil prices thanks to growing economic weakness around the globe. They are apparently betting on further economic weakness coming out of Europe and China, the main engine of oil demand.

But the oil price weakness scenario could change rather quickly. Current oil prices are now below what could be called the comfort threshold for most OPEC countries including Saudi Arabia. These countries' budgets have ballooned in the past few years as they have spent on improving their citizens' daily lives because of the fear of widespread unrest as the Arab Spring moves from country to country in that part of the world. It is believed that Saudi Arabia, for example, now needs Brent crude oil to be at around $90 a barrel in order to pay for all the domestic programs they have initiated.

So investors and hedgers should not be surprised if it soon throttles back on oil production. Hopefully, airlines and other big oil consumers will have hedged their exposure to higher prices by then.

This article was originally written for the Motley Fool Blog Network. make sure read all of my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/.

E-Commerce Drives Changes at UPS and FedEx

One of the most interesting changes which has occurred in the U.S. economy in recent years has been the rise of business to consumer e-commerce. From nowhere, it has blossomed into an approximately $170 billion industry with Amazon.com being the biggest e-commerce vendor. Amazon though is a well-known story to investors.

A more interesting tale may be to look at how e-commerce is completely changing the world for delivery companies like United Parcel Service (NYSE: UPS) and FedEx (NYSE: FDX). Just take a look at the numbers for UPS for example. Residential deliveries have jumped from about 20% of US volumes in 2000 to almost 40% last year.

The growth of e-commerce has been a mixed blessing for these two companies. Sales have increased as more and more consumers buy goods from e-retailers. However, due to the logistical challenges, delivering these type of packages from house-to-house is not a very profitable business especially for companies whose main business had been delivering many large packages to business customers.

Delivering small packages to individual homes squeezed profit margins at the delivery companies. The “last mile” can make up 75% of overall supply chain costs for these firms. Today executives at both UPS and FedEx admit that they have been wrestling with this problem since the early 2000s, but that finally they are getting a handle on it. And they may be right.

FedEx was the first delivery company to really come to grips with solving the problem. The solution? Dump the problem (low-value packages) onto third-parties. In 2004, FedEx acquired a company whose business was to drop off low-weight packages with the U.S. Postal Service for final delivery to individual homes.

This fits right in with FedEx's business model. A large number of packages is delivered to one site – the post office – reducing expenses. And it is a growth business. In the fourth quarter of 2011, average daily volumes at FedEx SmartPost grew 17% to 1.7 million. UPS rolled out a similar product in the U.S. and Europe last year.

Both companies have also tackled the chronic problem of missing customers at home and being forced to re-deliver packages. In October, UPS launched UPS My Choice which alerts customers before their packages arrive. This product both increased driver productivity and consumer satisfaction. FedEx has offered a similar service for several years through its Home Delivery service.

These type of innovative products may be just the beginning of a series of products developed by UPS and FedEx to improve their customers' experience. It is likely we'll see more mobile apps being used as a delivery tool soon, for instance.

Of course, one question remains with a big part of the companies' strategy. What happens when the Postal Service further reduces its services due to fiscal restraints. Piggybacking on top of the US Postal Service may not work in the long term and another solution will have to be found.

This article for originally written for the Motley Fool Blog Network. Be sure to check out all of my daily articles for the Motley Fool at http://blogs.fool.com/.