The Wholesaler continues to boost PVF coverage

BY MORRIS R. BESCHLOSS
PVF and economic analyst

The Wholesaler has taken a giant step forward in broadening the outstanding communications center of the PVF sector. In addition to the May PVF Hall of Fame issue, this November publication will become the second annual issue primarily devoted to the PVF industrial sector.

Featured this month will be the first of our new quarterly recap and forecast focusing on the dynamics of this fast-growing component of the PHCP industry. Compiled by Hall of Famer Gary Cartright’s P&E distributor organization, it will provide the most comprehensive overview of what industry participants need to know about planning for future pricing, lead times, mergers and acquisitions, as well as trends in the industry’s key product categories. Ed Scott, ASA senior advisor, told us that this is the most significant step forward that The Wholesaler, which he once owned, has taken since introducing the PVF Hall of Fame.

Also assuring The Wholesaler’s pre-eminent position as the PVF sector’s communications leader will be the ongoing popular Q&A interviews, PVF news briefs and our global economics insights, which have a direct impact on the direction of the PVF sector’s future growth.

The Wholesaler, in conjunction with the PVF Roundtable, carved out new ground with its Blue Ribbon Panel presentation at Chicago’s Standard Club on September 28. Four of the industry’s outspoken speakers -- F.W. Webb’s Ernie Coutermarsh, Chicago Tube & Iron’s Don McNeeley, Westbrook’s Sid Westbrook, and Crane/Stockham’s Tony Favilla -- riveted the 150 distributors, manufacturers and manufacturers reps in attendance with their on-target, dynamic analysis of the fastest-growing component of the PHCP industry.

Dwelling on the “current state of the PVF sector” the participants stuck to the various roles that their areas of expertise are playing in the PVF sector’s massive rebound this year. The general conclusion reached was that PVF is in the throes of a rebound that has a long way to go. Only an unexpected recession or a major terrorist attack, impacting the economy in general, could have a dislocating effect of what has been a universal industrial upsurge this year.

Crane/Stockham’s Favilla, enthusiastic from receiving Affiliated Distributor’s award as Supplier of the Year, emphasized the need of securing the right people to cement manufacturer-distributor relations. This comes at a time when most industry factors are enjoying the momentum, but not particularly focused on staffing for the future.

Westbrook, founder of the PVF Roundtable and pre-eminent oil patch expert, blamed the U.S. government for inhibiting expanded oil drilling, due to caving in to special interest groups. He blamed the U.S. Department of Energy for not overriding the limitations imposed on drilling opportunities by Florida, California and New York, and for not effectively confronting environmental restrictions.

Dr. McNeeley, president of Chicago Tube & Iron, and a professor of economics and metallurgy at Northwestern University, gave a brilliant summation of the expanding opportunities that lie ahead in the field of pipe, valve and fittings. He expressly focused on the additional PVF needs of automation, mechanization, and upgrading. He also noted the many projects coming down the pipe, generated by America’s accelerating infrastructural needs. As the only full professor in our industry, McNeeley has used his manifold skills to generate PVF knowledge and expertise through a training program associated with Chicago Tube and Iron, as well as Northwestern University.

Webb’s Coutermarsh noted, among other things, the significant rebound experienced by the Northeast, which has experienced many years of industrial and commercial downturn. Since F.W. Webb is a dominant distribution factor in that area, the company’s experience is obviously representative of the Northeast’s current upsurge.

The overwhelming popular response to this high-level presentation will likely result in future presentations of this type, sponsored by The Wholesaler/PVF Roundtable joint venture.

Since The Wholesaler is dedicated to the rugged independence of mainstream distribution and not beholden to any interlocking restraints, these presentations will continue to bring you the best and brightest, serving within the framework of the $25-billion PVF sector.

Manufacturing output reaches new peak
With all the sarcastic talk about the U.S. economy degenerating into a nation of “insurance salesmen and hamburger flippers,” it might surprise readers to learn that America’s manufacturing sector is operating at a record pace, indicating a high of $1.5 trillion this year. It puts the U.S. close to the top among the world’s first-class production leaders.

These revenues, even after adjustment for inflation, are far ahead of where they were at the turn of the new century. A main reason for the popular misconception about the diminishing manufacturing sector is that most observers think in terms of traditional industries that have moved overseas due to losing their domestic competitive edge. This has also hit some areas of the country much harder than others.

Conversely, the reason why the U.S. is still near the top of its manufacturing game is that we have been on the cutting edge of most new technologies, which have been developed and expanded in such new manufacturing centers as Silicon Valley. At the same time, the Northeast and large parts of the Midwest have suffered the detrimental effects of traditional de-industrialization.

The manufacturing sector includes the output of all finished product conversions plus the generation by all mines and utilities throughout the 50 states. With natural resource production becoming increasingly profitable and utilities operating close to overload, the latter two categories have turned in record performances this year.

However, among those employed in our nation’s 150 million-strong workforce today, only 11% are considered part of the manufacturing sector.

To put these numbers in perspective, almost 40% of America’s labor force was employed in manufacturing at the end of World War II. This slipped to 30% by 1950, when a quarter of this nation’s gross domestic product represented the output of the industrial sector.

Today, only a little more than one of 10 non-farm workers are engaged in manufacturing, which produces only 12% of America’s $13-trillion-plus gross domestic product total. This reflects the awesome productivity of which the American worker and his equipment are currently capable. It also indicates that even one-fourth of the 1946 percentage of the total workforce and its output must be measured against much higher absolute numbers.

In these statistics, however, lies the backbone of America’s production sector. Despite its diminishing percentage of workers, total U.S. output has never been greater. What has changed is the great diversity of products required by an overall economy that has tripled in the past 15 years. Although there has been an unprecedented tilt toward the service side, one-third of the products in common use today did not even exist in 1990. Just think of cell phones, laptop computers, the latest fax machines, broadband and the thousand others comprising the information highway.

Although the domestic automotive industry has shrunk considerably, this factor has been mitigated to some extent by the American-based manufacturing of foreign brands. Despite the decline of such basic industries as steel, textiles, machine tools and fabricated metals, such items as tvs, furniture, leather goods, electronics, defense spending, military and commercial aircraft, and the huge, growing health sector have more than made up for the decline of the traditional manufacturing sectors.

Also, small privately owned businesses have rapidly proliferated, providing niche products and components required to feed the rapidly expanding manufacturing sector.

Despite the general belief indicating a rapidly vanishing U.S. manufacturing sector, the absolute numbers prove that America continues to be among the world’s leading industrial powers. As long as the U.S. stays at the cutting edge of technological progress, this top rank position should be maintained.

Oil price decline threatens alternative energy development
Although both consumers and frightened politicians are breathing a sigh of relief at recent energy price declines, this development is not an unalloyed blessing.

The spur behind the expansion of Canada’s tar sands development, which currently makes most of its oil production available to the U.S. is a significant example. With America using over 20 million barrels a day of oil to convert to gasoline for its 233 million cars and trucks, two-thirds of this amount is dependent on such volatile political regimes as Venezuela and Nigeria, as well as OPEC sources such as Saudi Arabia, Iraq and Kuwait.

The danger of this dependence is a double-edged sword. With America’s $13-trillion-plus gross domestic production held hostage by foreign producers, the 25% reduction in oil and derivative gasoline prices since the mid-August peak has only temporarily diminished the high cost position of this potential calamity. If prices drop into the $50-plus range, an even greater threat will emanate from America’s increasing dependence on shipments from its northern neighbor.

With oil prices previously predicted to head up to the $80- to $100-per-barrel range in the next four years, such improving margins had inspired the massive expansion of Alberta’s Athabasca region’s oil sands programs. But it also encouraged the ultra-deep drilling into the huge oil discoveries recently made in the Gulf of Mexico.

As costs of extraction for these additional sources skyrocket, the assumption of such additional financing was based on the greater revenues attainable.

The danger of cutbacks in these programs has already been heard from Murray Edwards, chairman of Canadian Natural Resources Limited, a major participant in the red-hot Fort McMurray region of Canada’s Alberta Province. Projects already on the drawing board, such as Petro-Canada, France’s Total SA and Exxon Mobil, are presently teetering on the edge of a go-no go decision.

Edwards believes that prices needed to develop the critically required tar sands projects are already approaching the $60-per-barrel level, just under recent New York Mercantile Exchange contract prices.

Fortunately, projects already under construction have no plans to abrogate ongoing activity. Such production would catapult today’s 1.5-million daily barrel level to 4 million by 2010. If prices remain at today’s levels and plummet even lower, activity in Canada, Mexico, and U.S. start-up programs in oil shale extractions would be jeopardized.

America’s previous attempts at oil shale conversion in the early 1980s was aborted when post-Iranian Revolution crude oil prices dipped from $50 per barrel in late 1979 to the mid-teens by the mid-1980s. This was due to the global oil market being flooded, mainly by Saudi Arabia’s excess capacity.

Since OPEC, which controls 40% of global oil production, no longer has the capability to flood the world markets to the same degree, the world’s supply/ demand factors will eventually dictate prices and the extent of alternative energy development.

However, at present, there is a major tug of war developing within OPEC as to whether to go full bore and let prices drop further -- or cut back as Nigeria and Venezuela have indicated to squeeze alternative energy expansion, especially Canada’s tar sands development.
As oil prices per barrel teeter around $60, the outcome of this OPEC infighting will soon manifest itself.

Global oil supply/demand debate reaches peak
It looks as if the ongoing tug-of-war between the oil bulls and bears is heating up. This is the big question as to whether global oil supplies have peaked, or if there are additional reserves hidden away in the earth’s recesses that have only begun to be tapped.

This debate has lately been engaged in by such leading energy experts as geology pundit Daniel Yergin, who professes oil supplies to be available well past the end of this century. Hedge fund proprietor T. Boone Pickens, a hands-on oil patch veteran, claims that the two-to-one ratio of depletion over new reserves, since 1970, is bringing an ultimate shortage crisis to a head.

This time, however, the protagonists of oil abundance are Saudi Arabian state-owned Saudi Aramco, the world’s largest oil production company. Its chief executive, Abdallah S. Jum’ah, claimed that the world contains more than a century’s worth of crude oil, at present production rates.

Sharing similar thoughts were expressed by senior spokesmen from Exxon Mobil, who argue aggressively that oil shortages in the foreseeable future are a myth.

The crux of the pro-con argument seems to lie in the proven amount of oil reserves recoverable at reasonable cost and current technology. Also to be considered are the fears of the Saudis, who aborted the development of oil shale in the U.S. almost 30 years ago, by flooding the global markets at progressively cheaper prices.

It’s curious that the major oil oligarches seem compelled to broadcast major new deep sea finds, such as the Jack II Gulf of Mexico oil field, which will not be in production for five years -- if then.

The Saudis, with a quarter of the world’s substantiated reserves of over a trillion barrels, now contend that the earth’s producible potential is 5.7 trillion barrels of oil. This is five times the amount accepted by the world’s leading statistical organizations, such as the International Energy Agency, the U.S. Department of Energy and the National Petroleum Council.

Such mainstream analysts see a practical limit to supply. This number is pegged at 100 million barrels a day by Robinson West, chairman of highly respected consulting firm pfc Energy. This compares to a global demand level of 84.8 million barrels a day this year, and the 100 million barrels limit by 2012.

The key to a balanced supply/demand equation is extraction technology and cost. Obviously, the more difficult the extraction -- such as deep sea wells -- the more sophisticated is the prospective technology and its attendant expense.

Both the Saudis and the major oil companies have conveniently left these major factors out of the discussion. Prospective estimates of profitable development of the recently discovered Jack II field would mean price per barrel of oil well above the present level, adjusted further upward by inflation in the future.

Technology necessary to reach the ultimate extraction levels referenced by the Saudis would necessitate further development costs and evolutionary techniques not yet available.

Also to be considered are the added costs necessary to refine the high-sulfur crude that is predominant in Saudi Arabian and other Mideast oil fields. With only 20% of the world’s oil reserves considered light sweet crude, this means the construction need of a large number of new refineries, almost all of which will be located outside the U.S.

As for now, it serves the perceived benefits of both the Saudis and the world’s leading oil multi-nationals to dampen the public outcry for meaningful energy alternatives that will eventually replace fossil fuels as the driving force behind the internal combustion engine. As yet, that level of urgency has not yet been attained -- and will not unless a public outcry demands a government led national commitment.

 

Morris R. Beschloss, a 50-year veteran of the pipe, valves and fittings industry, serves as PVF and economic analyst for The Wholesaler.