Wednesday, May 28, 2008

US economy benefitting from increasing crude oil prices!

With the crude oil touching $130 per barrel all of a sudden the US looking more profitable. Take the steel industry for example; the US steel industry was hit very hard by the low cost competition from China. Year over year the steel factories were shut down resulting to huge job losses. But recent import and production figures show something different. The latest one year production figures for steel in US shows a 10% increase compared to 20% decline for the steel imported form China. These numbers show how the US steel is fast replacing the Chinese steel, possibly closing down the cost arbitrage that existed between US and China.

So how is Crude oil responsible for this! Analysts believe that the Chinese competitiveness has gone down because of the increasing cost of transportation for the bulky Chinese products. The Chinese Steel manufactures have to import raw materials like the coking coal and iron ore from Brazil and Australia. The shipping rates have gone up considerably for these products. For one barrel of oil the Chinese have to spend close to $10 on shipping. And with increasing crude oil prices the transportation cost will only go up, thus the cost arbitrage will become smaller.

There are analysts who predict that a similar trend will be seen in other bulky manufactured products, like air conditioners, washing machines etc. But we have to remember that many production facilities in US have shut down due to the rise in imports. It will take some time for businesses to put up new production facilities to take advantage of this new opportunity. It is clear that rising crude oil prices will make the domestic producers in US more competitive. At the same time declining dollar is helping the US exports to gain new grounds in Europe and Asia. Could this be a revival for the US economy which has only faced trouble so far in the new millennium? Well only time can tell, anyways they have more than 990 years to change things.