Jul 1, 2012 12:00 PM, By Rick Weber
Tank fleets still busy in the shale areas even as drilling slows for natural gas
Noel Perry, principal at Transport Fundamentals, said it's not due simply to the increase in fracking — there are environmental factors in play that may require even more trucks and trailers in the shale regions.
“The big kahuna is what to do with the process water that comes out of the ground once a well is drilled,” he said. “It's not ruining the local water table, unless the production company is incompetent. The preferred method is to inject water thousands of feet down into porous rock. But they're beginning to have a few earthquake issues — not big ones, but small ones — so people are beginning to question that. That means it's likely that water will be moved farther from the well, so the long-term prospect for tank trucks is good.”
Perry said that the drilling market for natural gas peaked months ago, with the number of natural gas wells being much lower than a year ago, leading to a 45% decline in demand for horizontal gas rigs and vertical/directional gas rigs. He described the oilfield outlook during an economic presentation at the National Tank Truck Carriers 64
“The good news is that fracking is just as effective at getting oil as it is for natural gas,” he said. “The drop in natural gas has been offset by an expansion in oil. Overall, the rig count is up 6%. So this market actually is quite healthy. If you're in a gas-only area, you're in trouble. If you happen to be in North Dakota (and the Bakken Shale), which is mainly oil, you're in great shape.”
He said the best-case forecast for the trucking industry is for moderate growth — 3% this year after 3% in 2011.
“This should give us a fairly good trucking economy for the next two years,” he said. “Remember, the economy goes up and down in relatively predictable ways. Usually, it keeps going up for four years after a recession. We've only had one recovery for less than four years. That was in 1982, when Volcker (Federal Reserve chairman Paul Volcker) and (President Ronald) Reagan purposely killed the economy to stop inflation. I don't hear either (Mitt) Romney or President Obama talking about killing the economy to solve some problem. We're two years into the recovery, and should have a few more.”
Perry said that right now, economists are in their “down mode” because the recovery has been somewhat disappointing. He believes their advice to the public is going to be “biased downwards,” so the public needs to put that into perspective.
“Most of what you read in the newspaper is biased downward,” he said. “You need to understand that economists are going to try to tell you to be more conservative than you need to be in the short term.”
He said US GDP growth is around 2.5%, down from 3.5%, partly because vehicle miles traveled have been trending down.
“Automobile use is clearly growing much more slowly,” he said. “It was a big part of our economy. Because of fuel costs, it isn't going to be growing as much. Automobiles are 10% of our economy. You take that from 5%-6% growth in good times to 2%, and you have a slow economy.
“You shouldn't be worried about growth, though. Historically freight didn't grow as fast as the economy. That's because your customers were trying to find ways to make the same sales with less transportation. Transportation growth is about half as much on average as GDP. This economy is more manufacturing- and export-oriented. That's good for all of you in this room. So you don't have to be as depressed as those selling massage services. Stop complaining. This is a pretty good market. As you think about how to deal with what you read in the paper, politicians and economists are worried about the fall but not worried about your business. It's not quite as bad. This is not a bad time to be in trucking. It's a good time.”
The next recession
Perry said economists are wrong — a lot — and if your economist tells you he knows the future, get on your knees and bow in worship. Or get a new economist.
“Getting the timing and depth of the business cycle right is impossible,” he said, “because it's subject to so many random things. We can only help you understand what the risks are.”
However, looking at the economy over the long term, as Perry did in his presentation, he said it's easy to predict that the probability of a recession in two to four years is “very high.”
“If you're a prudent businessman or woman and making investments in 2012, make sure those investments can survive a recession sometime between 2014 and 2016,” he said. “We will be having the next recession sooner than you think.
“As prudent business people, put aside your rhetoric and make sure your company can survive a recession in mid-decade. In the meantime, be happy because this economy is in much better shape than you think, and it's a bit more predictable.”
There's a short-term risk in the form of the uncertainty over Greece's place in the eurozone. The long-term risk is China, whose growth rate has gone from 10% to 7% (and is consistently inflated by Chinese officials, he said).
“The US economy is now 80% services — the part of the economy that is not very cyclical,” he said. “The Chinese economy is less than 30% services. The rest of it is 50% capital and the rest manufacturing. It is the most cyclical economy in the world, and they haven't had a bad cycle in 30 years. So they're really due. The whole world's supply chain has gotten used to 30 consecutive years of Chinese growth and is not prepared to deal with a Chinese downturn. If I was thinking about long-term economic issues, I'd be looking more than anything at what's happening in China.”
Perry said that the United States is in a normal economic recovery that is tracking at the same rate as the last recovery. It may not seem like it, but that's only because it's coming back from a much lower base.
“The housing numbers are starting to look better,” he said. “New sales will not take off until the existing inventory is consumed. The supply of existing homes is normal now, so we are beginning to get a modest recovery in new homes, and the leading indicator shows permits ran at an 804,000 annualized level in March, so it looks like the housing market is beginning to come back.”
On the hiring scene, he said trucking companies are troubled because the demographic trends are turning negative, and yearly additions to the labor force will drop by 56%. Throw in the regulatory controversies and the problem is exacerbated.
“FMCSA is promulgating a whole bunch of regulations, beginning last year with CSA and now hours of service,” he said. “If FMCSA continues on its current course and promulgates the regulations it has promised to promulgate, and not promulgate the things it is thinking about, like speed limits and restricting hours of delivery in cities, these things are on the table and add up to 400,000 worth of net driver capacity coming out of the industry in the next couple of years. So unless the courts stop FMCSA from doing what it's doing, you're going to have a driver shortage. There might be peak-season shortages and also pressure on driver wages.”
Most truckload cost factors are moving up — equipment, labor, overhead, and fuel. Price leadership is especially important in times of rising costs, Perry said.
“Pricing is strong given the condition of the economy,” he said “The moderation in fuel-price hikes will keep us below the 2004-05 peaks. Trucking has profoundly more pricing power than you think. And I'd argue that tank trucks are at the top end, not the bottom. So you get to control a lot of what pricing looks like. Over the next couple of years, if you are still mired in the culture your customers are encouraging you to be in — and that is, ‘How much will you take my pricing down next year?’- you're in big trouble.”
He said the makeup of the US tank truck market (dry and wet) is: food and feed 27%, fuels 25%, chemicals 25%, and energy recovery 23%.
“This was a $125 billion market in 2011, and it is very diverse,” he said. “The chemicals segment is expanding because of the trend in natural gas prices. The natural gas price has a major impact on chemical product costs.
“The food and feed segment moves mainly to non-economic variables. It has to do with weather. Long term, the food sector grows with population and net exports. So we have a positive in the US on net exports.
“The fuels segment is shrinking because of conservation. If you're in the gasoline-delivery market, you're looking at a declining market, not an expanding market. We have only touched the initial potential for conservation.
“As the cost of new, incremental oil supplies goes up, so will diesel prices. We can expect prices to move on an upward trend indefinitely. With global prices above $100 a barrel, the drillers respond. This is despite dysfunctional management of much of the capacity. Global oil-supply fundamentals are near the tipping point. It depends on politics and global growth.”
He said the long-term outlook for the United States is improving because it has the world's largest supply of natural gas.
“We are making surprising progress with regard to oil-import dependency,” he said. “The latest reading is 25% below the 2008 peak. We're less dependent on the Arabs than we used to be. It's working. It's not something George Bush did, not something Barack Obama did. It's something we all did, because as the price of imported fuel goes up, we find a way to get substitutes. It's working.”
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