The largest drop in energy costs in decades has to have an impact on construction costs and markets. But perhaps not as much as you may think.
"The impact of the drop in oil prices will be limited to a few specific markets, such as petrochemical plants, and it will be very regional," says Robert Murray, chief economist for Dodge Data & Analytics. He still predicts that the dollar value of total construction starts will increase 9% to 10% this year. "The pullback in manufacturing is dampening growth but not causing a decline," he says.
However, the downturn in the manufacturing sector will be severe. "We had a surge in petrochemical work last year and expected a slowdown in 2015, but now we expect that slowdown to be even stronger due to the drop in oil prices," Murray says. That is also adding to the deferral of pipeline work. He predicts that, overall, the manufacturing sector will decline 25% this year. However, Murray points out that this downturn follows two very strong years of growth for the manufacturing market.
"When we look at major markets, we predict that non-residential construction will settle back to a 6% annual increase in 2015, after a 19% gain in 2014. However, if we exclude manufacturing, we would be looking at an 11% gain this year in the non-residential building market," he says.
On the plus side, Murray believes lower oil prices will help boost consumer spending, which should have a positive impact on both the commercial building and homebuilding markets. "The drop in oil prices will have a mixed impact on construction, but, in net, we think it will be positive," Murray says.
In addition, Murray says there are indications that oil prices have bottomed out. "The key to our forecast is the duration of the decline in oil prices and when they will stabilize. What we have seen in February and March is oil prices edging upward, and, as a result, we think the overall impact of lower oil prices on construction will be relatively small," he says.
Anirban Basu, the chief economist for the Associated Builders and Contractors, agrees that the positive side of lower oil prices outweighs the negative side. "Lower energy prices are reducing the input cost of producers for most construction materials, especially the drop in diesel fuel prices on transportation costs. That's good news for the industry because it shrinks overall costs," says Basu.
"Lower fuel prices will reduce tax revenue for highway projects, but, on the other hand, those projects become cheaper to deliver," he adds. "Also, lower fuel prices means people will drive more, helping to boost gas-tax revenue. So, in the end, I think it's a wash."
Most state and local governments do not depend heavily on gas taxes to fund construction, he adds. "However, it may threaten future projects if the federal Highway Trust Fund becomes depleted. But, for now, with lower material costs, state and local governments will find it easier to push projects forward, given their limited budgets, he says.
"Falling interest costs combined with falling materials costs will be a boost for construction. I have talked with several contractors, and they all say they have not seen any slowdown in the market," says Basu.