Confidence is rising, despite oil shock

Feb. 24, 2011
“The findings from our latest Business Barometer show that companies are turning a corner in their hiring and investment plans amidst renewed confidence in the health of consumers and an improved outlook for industrialized economies such as the U.S. and ...

The findings from our latest Business Barometer show that companies are turning a corner in their hiring and investment plans amidst renewed confidence in the health of consumers and an improved outlook for industrialized economies such as the U.S. and Europe.” –Michael Griffin, executive director-global research for the finance, strategy and legal practice at the Corporate Executive Board

Though the specter of $5 diesel is again raising its ugly head as oil prices head above $100 a barrel, overall business confidence seems to keep building in the ongoing global economic recovery. That confidence, I think, will be critical in the days ahead as hysteria over oil continues to build.

I say “hysteria” because the Saudi Arabian oil ministry has already told the Organization of Petroleum Exporting Countries [OPEC] that it’ll step in to replace any petroleum production lost to the civil unrest that continues to spread across Libya.

Though Libya is the 12th largest oil exporting country in the world, it only exported some 1.49 million barrels per day (b/d) in January, with Europe receiving more than 85%t of Libya’s crude exports, while about 13% heads east of the Suez Canal, according to data tracked by the International Energy Agency (IEA).

The long and short of all that is quite simple: if Libya’s oil production exits the global crude market completely, there’s already capacity in line to replace it. That factoid alone has helped lower the price of Brent oil futures back down today, from north of $119 to $114. Hopefully, that will calm crude oil markets and allow the struggle within Libya to oust that nation’s dictator of over 40 years, Col. Moammar Gadhafi to reach a conclusion without negative international interference.

So, OK, back to business confidence, for this is what will sustain not only an economic recovery but bolster freight volumes as well.

According to the Corporate Executive Board’s (CEB) quarterly Business Barometer survey, the collective optimism of over 430 senior executives across 33 different industries boosted the group’s its “confidence sentiment” index by 1.5 to 50.6 in the first quarter this year compared to 48.9 in the fourth quarter of 2010 – marking the second consecutive quarter of executives' improved economic outlook.

Notably, CEB said 82% of senior executives expect their firms' revenues to increase, up from 76% in the fourth quarter, with 50% expecting meaningful growth of 5% or more. Additionally, 69% of senior executives expect their industries' revenues to grow in the next 12 months, compared to 62% in the fourth quarter last year.

One of the most significant improvements regarded senior executive sentiment concerning consumer confidence, with 56% expecting consumer confidence to improve, compared to just 39% and 38% in the fourth and third quarters, respectively, last year. Growth prospects in the U.S. and European Union also improved dramatically, with 50% of executives now seeing stronger economic growth in these industrialized economies, compared to 32% in the last two quarters of 2010.

Of course, there are worries, too. Despite the improved growth outlook, the CEB’s survey indicated that companies continue to face a challenging cost environment:

• About 84% of senior executives surveyed expect higher costs of core inputs in the next 12 months, compared to 74% in the fourth quarter last year – the highest reading since the start of the index.

• Almost 98% of senior executives surveyed expect the cost of energy and non-energy related commodities to either remain at current levels or grow even higher.

• In the next twelve months, 48% of executives surveyed expect to operate in a higher interest rate environment.

• Finally, 78% of senior executives expect higher labor costs.

Now, of course, this is small sample – we’re talking just over 430 executives here. But still, these are the kinds of folks that don’t believe in mere hope as a business survival strategy. They’re looking at all sorts of data collected inside and outside their companies so they can prepare for future, be it good or bad.

And right now, things seem good – or at the very least better than they’ve been. Indeed, the increase in monthly truckload freight tonnage tracked by the American Trucking Associations – up 2.5% in December and up another 3.8% in January – serves as another indication that things are going well.

Now, could all of this come off the rails if oil stays above $100 per barrel? Yeah, I think so. But as we’ve seen with Saudi Arabia stepping into the crude production gap created by the ongoing revolution Libya, that’s a catastrophic economic scenario that may just get nipped in the bud.

About the Author

Sean Kilcarr 1 | Senior Editor

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