Sat, Nov 17, 2001 page21

• Retailers welcome oil-price drop

  PROFIT MARGINS Though it will take more than a decline in the oil price to reverse the slump for many, starting with the airline industry, every little bit helps

  • BLOOMBERG
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  Two months ago, when oil hovered above US$28 a barrel, Indonesia's flagship airline PT Garuda Indo-nesia was spending US$10 million a month on fuel.

  Now, with crude oil at a two-year low of under US$17 a barrel, the carrier expects to save more than US$3 million a month. "We're hoping the price won't go up again," said finance director Emirsyah Satar.

  So are rival airlines, makers of ships and mobile phones, and retailers around the world. Lower crude oil prices cheapen transportation and help drive down the cost of making goods and services. That lowers prices paid by households and encourages them to spend more.

  The result is what economists and investors term one of the few bright spots since Sept. 11, when terrorist attacks in the US left more than 4,600 dead and brought the world economy to the brink of recession.

  Global tax cut

  "It's the same as a big tax cut for the global economy," said Henk Boom, who helps oversee about 4 billion guilders (US$1.6 billion) at Optimix Vermogensbeheer in Amsterdam. Boom bought shares this week in luxury goods maker LVMH Moet Hennessy Louis Vuitton SA, electronics maker Royal Philips Elec-tronics NV and phone equipment maker Siemens AG.

  Crude oil fell 20 percent this week alone as OPEC refused to cut supply by 1.5 million barrels a day unless non-OPEC countries such as Russia also reduced production. The cost of a barrel of crude oil fell 12 percent in New York Thursday to a two-and-a-half year low of US$17.45, and has slid about 36 percent since Sept. 11.

  Falling fuel bills "are putting dollars back in the consumer's hands," said Wal-Mart Stores Inc CEO H. Lee Scott.

  Injection of spending

  The impact on the world economy could be substantial. Oil prices fell more than US$11 a barrel in the last two months. A US$10 drop in the oil price boosts world trade by about 0.5 percent a year, according to estimates by HSBC Holdings Plc.

  To the average European household, a 10 euro (US$8.80) decline in oil prices is the equivalent of a tax cut worth 800 euros per year, according to Merrill Lynch & Co.

  In the dozen countries sharing the euro, a 20 percent drop in the price of a barrel of oil adds 0.4 percentage point to gross domestic product growth and shaves four-tenths of a point off inflation in the first year, according to estimates by Paris-based brokerage Exane.

  The drop in oil prices means "there's an injection of spending power into the Western economies," said Bank of England Deputy Governor Mervyn King.

  Even so, dropping oil prices are a mixed blessing because they also reflect a weakening global economy. The US economy shrank in the third quarter for the first time since 1993. The economies of the dozen countries sharing the euro grew 0.1 percent in the second quarter, the slowest pace in almost three years.

  It will take more than oil price declines to reverse the slump for many, starting with the airline industry.

  "Lower fuel costs are a drop in the ocean compared to the airlines' overstretched balance sheets and people feeling poorer or nervous about flying," said Ralph Kent, an analyst at Morgan Stanley Dean Witter & Co in London.

  Airlines, reeling from business lost after travel declined following the Sept. 11 attacks, say any good news is good news.

  British Airways Plc, which earmarks 13 percent of its total costs to fuel, saw shares surge 12 percent on news of tumbling crude. "We will benefit," said Louise Evans, a spokeswoman.

  "It's quite a relief on the cost side compared to the figures we've seen earlier this year," said Thomas Hofmann, chief financial officer of Swiss regional airline Crossair AG.

  Shipping for less

  Shipmakers also cheered the prospect of transporting people and goods for less. "It's a stimulant to world trade," said P&O Nedlloyd Container Line Ltd. Managing Director Robert Woods on a conference call with journalists. P&O Nedlloyd is the world's second-largest container shipping company.

  Makers of intermediate goods -- components or raw materials used in making manufactured products -- - looked forward to spending less on fuel and making more profit.

  LG Chem Ltd, South Korea's biggest maker of plastics for everything from floor mats to mobile-phone batteries, is hoping cheaper oil will help it cut costs.

  "If oil prices fall, our raw material costs drop and margins get wider," said Theodore Kim, a spokesman at LG Chem.

  "On average, this drop in crude is going to allow an improvement in profit margins," said Giorgio Squinzi, who heads Italy's chemical-industry federation and is chief executive of adhesives maker Mapei SpA.

  On the other hand, the margins of raw-material makers will come under pressure from clients demanding lower prices.

  "If oil prices continue to fall, I would expect suppliers to reduce the prices charged for oil-based raw materials," said Robert Tieken, chief financial officer at Goodyear Tire & Rubber Co, where oil accounts for 25 percent of the cost of making a tire.

  Prices at the pump

  Consumers, in turn, may initially see little benefit as gasoline taxes keep pump prices high. In the UK, which has the highest gas tax in the industrialized world, three-quarters of the retail price of gasoline is tax.

  "The price of crude has dropped about a third, hasn't it? I wish the price at the pump had dropped by a third," said Tim How, chief executive of the UK's Majestic Wine Plc, which has more than 100 vans servicing its 93 stores. "It's jolly good news, but in the scheme of things, it means very little."

  Investors are thinking more about the good news, especially for companies whose products are bought directly by consumers.

  Shares of Nokia Oyj rose 41 percent since oil prices started dropping. Vivendi Universal SA, producer of the movie Jurassic Park III, rose 25 percent.

  Last year in Europe, rising oil prices pushed up inflation, trimming growth in the dozen countries that use the euro by three-quarters of a percentage point. Oil alone accounts for 9.5 percent of inflation in the 12 countries, according to Exane.
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