Cheap oil drives changes in industry

For more than a year, low gasoline prices have been adding extra froth to the nation's steadily rising auto sales.

Dealers and automakers have enjoyed a surge in sales of high-margin pickups and SUVs. For consumers, paying less at the pump has boosted their confidence about splurging on new wheels and loading up on high-trim options.

Ford Motor Co., General Motors and other automakers are reporting record North American profits, and when the industry reports December sales this week, 2015 may turn out to be the best year ever, with U.S. sales topping the 17.4 million vehicles that were sold in 2000.

But there is a flip side to the cheap-oil dividend: It crimps vehicle sales in regions that are heavy in oil and gas production.

The weakness can be tough to detect, because the impact tends to be localized, and obscured in state-by-state data by broader strength in the economy. But dealers in certain markets say they are seeing a retreat from the drilling boom that helped drive up sales and profits.

"Definitely [crude] oil prices have impacted us," said Mitchell Dale, owner of McRee Ford in Dickinson, Texas, between Houston and Galveston. "The consumer has gone into a little bit of a cautious mode. Sales are still fairly good but aren't moving at a real brisk pace, and traffic is off."

One pocket where the trend is most clear is in an 11-county area around Dallas-Fort Worth, an area that overlaps the massive Barnett Shale natural-gas field. In the first nine months of 2015, retail vehicle sales in that area declined 4.4 percent, according to the TexAuto Facts Report published by InfoNation Inc., a market research firm that tracks auto sales in the state.

"The Texas market has softened in the last six weeks," said Steve McDowell, InfoNation president. In view of the price of oil and layoffs in the industry, "this could be the norm for the next few quarters."

In Oklahoma, where the economy is less diversified than Texas', the impact is more pronounced. In the first 10 months of 2015, registrations of new vehicles dropped 3.1 percent, according to IHS Automotive -- the largest statewide decline in the country.

"The main issue for us relative to energy impacting our sales would be our new- vehicle sales in the state of Oklahoma," Earl Hesterberg, CEO of Group 1 Automotive Inc., which has 14 stores in the Sooner State, said in an Oct. 27 conference call. The company's Oklahoma sales were down 5 percent in the third quarter.

Not so long ago, the ability to tap new sources of oil and natural gas through the process known as hydraulic fracturing, or fracking, was sparking boomlets across Pennsylvania, Ohio, North Dakota and other states rich in shale deposits. The arrival of oil drilling crews and sudden payments to landowners for mineral rights brought unheard-of prosperity to some rural areas, and a rush of customers into dealerships in search of new vehicles, especially big pickups.

Although it's a relatively costly means of extraction, fracking was a profitable endeavor as long as crude was selling for more than $100 a barrel, where it mostly stayed after 2011 when the economic recovery took hold.

But by the summer of 2014, China's economic growth was slowing markedly, damping its oil consumption. And following the predictable plot of an economics textbook, the rapid rise of new fracking wells led to a glut of domestic oil, causing prices to collapse just as fast.

By March 2015, crude prices had dipped below $40 a barrel, upending the economics of fracking. Last week, the price hovered around $36 to $38 a barrel.

As a result, many companies have shut down drilling operations. Oil-field service companies Schlumberger and Halliburton have each laid off more than 10,000 workers. Royal Dutch Shell has cut 7,000 jobs.

"At $70 a barrel, the car business would be on fire," said Bill Baker, general manager of Volvo of San Antonio. He added that he has seen trucks and oil-field equipment parked along Interstate 37 on the way to Corpus Christi. Normally, all that equipment, belonging to oil and gas service companies, would be out in the field.

"When those people ain't working, you're taking a good chunk of the market away," he said.

Other states that benefited from fracking booms haven't yet felt the impact as much as Texas and Oklahoma:

•  Pennsylvania: The Keystone State lies atop a large swath of shale deposits known as the Marcellus Formation and eagerly embraced fracking to unlock natural gas trapped there. But falling energy prices and a halt in drilling of new wells caused by talk of a new extraction tax haven't slowed auto sales. New registrations in Pennsylvania rose a solid 6.4 percent in October and were up 2.7 percent in the first 10 months of 2015, the latest period for which state-by-state IHS data are available. "The oil and gas activity has really slowed down, but we're having another record year," said Tom Miles, a salesman at Blaise Alexander Chevrolet-Buick in Muncy, Pa. "There's no new wells, but we're still selling trucks. We went from being a medium dealership to a large dealership and we've maintained that." 

•  Colorado: Tim Jackson, president of the Colorado Automobile Dealers Association, said his state's oil-rich western counties are feeling the pinch of lower energy prices, but the rest of the state is firing on all cylinders. New-car registrations leapt 19 percent in October and were up 9.6 percent in the first 10 months of 2015. "In the non-oil counties, it's overall positive economic news," he said. "The Colorado economy is outperforming the U.S. as a whole. We have lower unemployment, strong home sales. We're not really seeing a negative impact from oil prices statewide." 

•  Ohio: A little over a year ago, many farmers in rural Ohio were flush with cash from land royalties as a result of the fracking boom, and using it to buy well-equipped pickups. Even as the drilling boom turned to bust, auto sales have continued to expand. In October the state's new registrations increased 3.2 percent. They were up 1 percent from January to October."Business has let off a little bit because of the fracking situation but it's still pretty darn good," said Doug Waikem, whose family owns stores selling Ford, Hyundai, Honda, Nissan, Kia, Mitsubishi and Subaru vehicles and in Massillon, Ohio. 

•  North Dakota: Many small towns saw their populations double as a result of a sudden influx of oil-field workers to this sparsely populated state. Its auto sector is so small that it's hard to gauge any change. In the first 10 months of 2015, 29,309 new vehicles were registered, 13 more than in the same period a year ago.