Uber’s Road to Profitability

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About 10 years ago, it was obvious that one should never sit in a stranger’s car. In March 2009, Uber Technologies Inc. sought out to change that norm and disrupt the taxi industry. 8 years later, they have reached complete dominance over the industry through their transportation app, Uber. Founded by Travis Kalanick and Garret Camp, the app was originally an effort to create an affordable black car service, which soon transformed into a massive ridesharing platform. Today, they operate in over 80 countries and over 670 cities worldwide (Uber). However, they are still growing. They now offer a low-cost ride program, rides in black cars, food delivery service, and more. According to Kalanick, the Uber app has more than 40 million active riders worldwide (Vanity Fair). Yes, that is 40 million people actively using 1 platform.

Although those numbers do sound sexy, the company is actually not making any money. During their past four quarters of operations, Uber experienced losses exceeding $3.3 billion. With this outrageous number, Uber has become the most loss-making private company in tech history. Simultaneously, the company has also become the highest valued private technology company. According to Bloomberg, Uber is valued at $69 billion (Bloomberg).

At this point, you might be thinking, “How does a company that continues to make no profit get such a high valuation?” Before understanding how a company gets valued, it is important to grasp the intentions of an unprofitable company. It is comprehensible for a startup business to not make any money within their first year or two in business. However, Uber has been around for more than 7 years, has raised over $11 billion, and still is unprofitable (Crunchbase). It may sound counterintuitive to stay in business after making no profits for such a long period of time, right? In fact, companies can become very successful and attract many investors even without making profits for lengthy periods of time.

There are three core principles that companies follow in order to survive without any profits. The first method is to continuously reinvest in the company. According to Uber’s release to Bloomberg, the company’s net revenue was $6.5 billion, excluding revenues from China (Bloomberg). Therefore, earnings are significantly large, but Uber is choosing to reinvest that money back into their company. The purpose is to continue their growth and boost future revenues. This intentional reinvestment strategy has been proven to work with Amazon, which irregularly reported a profit throughout more than twenty years in business to focus on growth. Amazon obviously has the ability to allow profits, but argues that they must constantly reinvest into the company in order to compete in different fields.

Another way a business could continue to operate without any profits is the expectation of potential expansion. Twitter was a great example of this, as they acquired Vine, Periscope, and other platforms in an effort to expand its social media presence. However, they are dealing with significantly large expenses due to the compensation of stock options. Other companies that used this method include Yelp and Spotify. Although Yelp reached profitability in 2014 through expansion, Spotify is still in the process. Similar to Uber, Spotify has consistently experienced increasing revenues, but still has continuously shown upwards of a billion dollars in losses. Their strategy is to increase their number of users on their free service to potentially convert them into subscribers.

Lastly, an unprofitable company can remain in business because of its speedy growth in its early stages. Tech companies that can show a rapid increase in user growth will secure the backing of venture capitals. Through the investors’ perspectives, they see massive potential due to their user base and disregard the early revenue drought. Uber is definitely the leading tech company in this category. As mentioned earlier, Uber’s valuation is extremely high, surpassing many established car-rental companies and airline companies, and it is exactly because of this reason.

All three of these categories play a crucial role in generating a valuation of an unprofitable company. In the case of Uber, their valuation is driven by the tremendous confidence investors have in the company due to its user base. However, the large size of the backing will make it challenging for Uber to deliver long-term. It is very important for Uber to continue to convince investors that profits will begin to unfold. It is very easy for investors to lose confidence in the company’s abilities to generate future profits. So why do investors continue to invest in Uber? Obviously, they trust the company’s growth models that will keep their stock high. They also have faith in the company’s ability to reach their large goals.

Usually, when evaluating a firm, one would pay close attention to the price-to-earnings ratio. This ratio suggests how much an investor would have to put into the company in order to get $1 in return. However, this ratio is irrelevant for many tech companies, such as Uber, as they do not have any profits to show in its early stages. Also, tech companies do not have many assets other than the software, which is extremely hard to value as is, so the price-to-book ratio is also out of the equation. Instead, investors of Uber, and other unprofitable tech companies, would look at their price-to-sales ratio to determine the company’s valuation. This ratio compares the stock price of the company to its revenues. This is an indicator of the value placed on each dollar of a company’s sales or revenues. Uber’s valuation of $69 billion and its net revenue of $6.5 billion in 2016 gives the company a price-to-sales ratio of 10.6. This ratio is much higher than the S&P 500 Information Technology Index price-to-sales ratio, which is the highest compared to all other S&P 500 sectors.

The technology industry is known for its overgenerous valuations. Even based on the technology industry standards, Uber’s valuation is still very high. However, if Uber was treated as a transportation company instead, they would be nowhere near their current valuation. The price-to-sales ratio of the S&P 500 Transportation Index is 1.5. Therefore, Uber’s value would have to fall by 86% to associate with the average transportation company. However, it is obvious that Uber enjoys being in the technology category.

Regardless of the industry, a company’s valuation also reflects their business plan. For Uber, investors are paying very close attention to the company’s path to make money and if they seem attainable and realistic. Although it is not possible to accurately predict when and how the company will become profitable, Uber must be very convincing to deserve such a high valuation. They have somewhat modeled themselves after Amazon, which had successfully completed the process after years of net losses. According to Mike Walsh, and early Uber investor, “There are many companies, Amazon as an example, that invest heavily in the early years and hit profitability only after a company IPO.” (CNN). However, the most Amazon lost in 1 year was less than $2 billion, even at the peak of the dot-com boom.

Uber generates revenue primarily by charging clients for the rides, taking around 20% of the total fare. The company has reached such enormous growth because of how convenient and affordable it is for consumers. This resulted in Uber stealing market share from taxis and other traditional transportation methods. Even drivers began to switch, realizing that driving for Uber would allow them to make more money than driving a taxi. This is largely because of the fact that Uber allows drivers to better optimize their time and services. However, these drivers are responsible for the depreciation of their own cars, which is not factored into the ride.

The affordable prices for users and high incomes for drivers are all part of a long-term strategy. Uber is essentially subsidizing each trip. The plan is to dominate market share and drive taxis and other competing rideshare companies away. The prices are expected to increase as the initial process of acquiring customers begins to slow down. Currently, drivers for Uber are essentially donating the use of their own cars in exchange for the company’s growth. This does not get factored into Uber’s actual cost of operation.

Is Uber’s business model sustainable? Will they eventually become a profitable company? How long will that take? These are obviously very important questions to consider. Clearly, Uber is significantly unprofitable as of right now. However, you can make the argument that the company’s losses are diminishing over time. As seen through the chart, Uber has the ability and control to accelerate or slow their spending to become more or less profitable. This is important evidence to deliberate when making the case that in the long run, Uber does have potential to become profitable. Many optimists argue that the company is so large that people are just not used to the losses on such a large scale. Their revenues are also massive, and are quickly growing. However, they might be taking a longer time getting their global business under control, whereas a smaller business, such as Snapchat, would not take as long. This could be due to their attempt to break the norm, as well as the need for actual drivers and app awareness.

However, recent headlines have given Uber a tough time throughout their road to success. Earlier this year, Uber got caught up in allegations of prevalent sexual harassment throughout the workplace. Not to mention, the company even experienced a #deleteuber campaign throughout social media, and accusations of technology theft. As controversies added up, investors began to question Travis Kalanick, the current CEO and Co-Founder, and his ability to run the company. Kalanick had become a massive liability to the company due to his unclear business practices, poor management skills, and concerning lawsuits. Therefore, Kalanick resigned as CEO of the company back in June of this year.

After a couple months of searching for the perfect candidate, Dara Khosrowshahi was hired as the new CEO in August to get the company back up on its feet again. Khosrowshahi’s resume includes being the former CEO of Expedia, becoming one of the highest paid CEO’s in America, and being a board member of BET.com and the New York Times Company. He believes that although Uber is unprofitable as of right now, the “math is working” in certain countries, and that they are currently focused on subsidizing other investments. In an interview by Andre Ross Sorkin, a New York Times columnist and CNBC anchor, Khosrowshahi mentioned that Uber will not be profitable in the U.S. for the next six months, depending on the performance of their rival company, Lyft (CNBC). He has inherited a company that has been hit with a public scandal, the faction among its board members, an investigation into workplace harassment, and many other lawsuits. Therefore, he has not been given an easy task.

So, how do these public-relations woes impact the Uber’s road to profitability? Ultimately, they take away from the company’s primary focus – growth. Instead of concentrating on expansion, reinvestment, and strategies for profitability, they are forced to deal with fixing their public image.

However, it has been announced that Uber does have big plans for the future. They are currently in the middle of negotiations with SoftBank Group for a multi-billion-dollar investment deal. The Japanese-based company has global ties that could potentially help Uber in its constant international expansion. Also, Uber has recently agreed to a deal to purchase thousands of self-driving cars from Volvo. Last year, Uber and Volvo joined together to develop autonomous vehicles that will potentially become the future of Uber. Additionally, Uber’s project, Elevate, is set to bring “flying cars” into the market by as soon as 2020. They have partnered with NASA to sign a Space Act Agreement that will allow these low-flying, possibly self-flying, aircrafts to become a reality.

Uber has already begun taking steps to prepare for an IPO. Khosrowshahi announced in an interview that the company plans to go public in 2019. This will be a big day for investors, and a brand-new chapter for the company. Uber has the chance to live up to its extremely high valuation. It is clear that they have big plans for the future that can potentially allow the company to generate massive amounts of profits, but only time will tell.

 

https://uberestimator.com/cities

https://www.vanityfair.com/news/2016/10/travis-kalanick-uber-ipo

https://www.crunchbase.com/organization/uber

https://www.bloomberg.com/gadfly/articles/2017-03-16/uber-needs-to-get-real-about-that-69-billion-price-tag

https://www.bloomberg.com/news/articles/2017-04-14/embattled-uber-reports-strong-sales-growth-as-losses-continue

https://www.cnbc.com/2017/11/09/uber-ceo-dara-khosrowshahi-speaks-at-nytimes-dealbook-conference-2017.html

https://techcrunch.com/2017/11/09/uber-ceo-says-2019-is-the-target-for-ipo/

A Redesign? Oh, Snap!

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Prior to Snap’s IPO in March, it had been evident that Snapchat was on its way to revolutionize the virtual communication process. However, this vision has been a concern for Wall Street. Ever since they went public, the company has lost over $3 billion and has not traded above its IPO price of $17 a share since July, despite the 44% surge during their first day of trade (Yahoo Finance).

On Tuesday, November 7, the California-based company released an earnings report, which included revenue and user growth for the third quarter, that was well below Wall Street expectations. This report was followed by a statement from their billionaire CEO, Evan Spiegel. He startled investors with news that Snapchat will undergo some major changes, indirectly justifying that the mobile app is struggling to compete with its archenemy, Facebook.

Snapchat has never had a strong revenue model. The company has always relied on tailor-made, custom advertising, which has been their primary source of revenue. However, Spiegel announced that they will be implementing a more programmatic method, using automated auctions to bid on a slot. Sounds familiar, right? Yes, Snapchat advertisements may start to feel a lot more like what you see on Facebook and Instagram. This is expected to result in less human involvement and much cheaper ads.

Snap also plans to completely redesign the Snapchat app, which is expected to launch on December 4, 2017. According to Spiegel, the redesign will be focused on responding to the feedback that the app is “difficult to understand or hard to use.” Most Snapchat users, including myself, would agree that the platform can get a bit confusing, especially for the older crowd. Its IPO filings even included a step-by-step tutorial on how to use the application.

Spiegel agreed that the redesign could be disruptive to their businesses in the short term and that is it unclear how their community will respond to the changes. However, he went on to explain that this is a risk they are willing to take because they believe in the long-term benefits. Ironically, Snapchat needs to do what Facebook did years ago and cater towards different age groups, not just teenagers.

This may be the reason behind Tencent’s decision to acquire a 12% stake in Snap Inc. just hours after Spiegel’s announcements. According to Bloomberg, Tencent, the Chinese company behind WeChat, has developed very successful chat apps through engaging content, integrated services, and advertising (Bloomberg). It is apparent that they are trying to do the same with Snapchat, which has a larger U.S. audience than Tencent.

Will these serious changes help Snap Inc. climb out of its deep hole? As of right now, it is still unclear. Although investors might not be convinced, Spiegel and his team are confident that the long-term benefits will be worth it. I guess we will just have to wait and see.

 

finance.yahoo.com/quote/SNAP

https://www.bloomberg.com/news/articles/2017-11-08/tencent-buys-10-percent-stake-in-social-media-company-snap

https://investor.snap.com/~/media/Files/S/Snap-IR/reports-and-presentations/snap-inc-q3-2017-prepared-remarks.pdf

The Future of Container Shipping: What’s Next?

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The world is constantly changing and evolving, as new technological advancements continue to materialize. With new findings in technology comes improvements and upgrades in different industries. But what could this mean for a traditional industry like container shipping?

From the looks of it, most people would think that the container shipping industry has not experienced much change in their operations for the past several years. However, that is not true.

During the late 1950’s, cargo was loaded into shipping vessels manually by workers at the dock, and then again unloaded by workers once ships arrived. Eventually, the use of containers transformed the industry, allowing more goods to be stacked and be shipped easier. As a result, ports were forced to rebuild themselves to be able to store the containers, implement huge cranes for their operations, and include highway and rail terminals to send ships directly to the ports. This advancement revolutionized trade and sparked a global economic boom.

But what is the only other way to allow even more goods to be transported? Larger ships! Over the years, ships have gotten so massive that it gets you wondering how they still stay afloat. Companies quickly realized that regardless of the ship’s size, approximately the same number of sailors were needed to operate the ship and less fuel per container was needed to move larger ships. This is a trend we will continue to see, which is largely a reaction to containerization and automation which allows faster loading and discharging of vessels.

Larger container ships are not the only trend the shipping industry is experiencing. Shipping companies are reinvesting into specialized ship types. This is mainly seen in areas of heavy lifting or transportation of certain chemicals. There are extremely specialized ships that are being constructed, with capabilities to only transport specific items, such as parts of offshore windmills. This has developed employees that specialize in ships and trade in niche industries.

Along with the worldwide trend of going green, shipping is also focusing on developing a green image. Innovation has allowed a reduction in the negative environmental impact caused by shipping. There is now an increasing amount of engine improvements, propeller performance, and friction-reducing air cushions. However, this is only just the beginning. As more ships and methods of operating are becoming specialized, the maritime industry is moving more towards an environmentally friendly era.

www.morethanshipping.com/evolution-of-container-ships

www.vox.com/2015/1/8/7513317/container-ship-msc-oscar

10 Future Ships that Would Change the Face of the Shipping Industry

https://www.ajot.com/blogs/full/the-future-of-container-shipping-may-be-smaller-than-we-think

Crude Oil Prices – Contract to the Future!

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Economies can rise or fall depending on the fluctuations of oil prices. Industries that are reliant on fuel costs can experience either a good or bad quarter due to these fluctuations. The volatility of oil prices always gets people thinking – “What is the price of oil going to be 6 months from now? Next year? In 2 years?” These are valid questions to consider while managing your budget at either a personal level, such as purchasing or leasing a car, or even while making important business decisions. Unfortunately, there are no analysts, experts, or commentators that will be able to decisively and accurately forecast the price of oil. However, it is certainly possible to make a well-educated guess about the short-term and long-term direction of oil prices by looking at future contracts.

According to The Options Guide, “Crude Oil futures are standardized, exchange-traded contracts in which the contract buyer agrees to take delivery, from the seller, a specific quantity of crude oil (eg. 1000 barrels) at a predetermined price on a future delivery date” (The Options Guide). In other words, a futures contract guarantees the buyer his or her commodity at the contract price, regardless of the market price at that specific date. These futures are traded in the New York Mercantile Exchange (or NYMEX) and the Intercontinental Exchange (ICE) where West Texas Intermediate (WTI) and North Sea Brent crude oil are traded respectively. Traders can buy or sell oil for delivery many months or years ahead. Historically, the majority of activity in commodity futures markets had been focused on oil for delivery in the next few months. However, in recent years, the activity has increased for more future deliveries as more investors had begun pouring money into it.

These future contracts evolved many years ago, with farmers being known as the pioneers of it all. Farmers, or sellers, and dealers, or buyers, would agree to a future exchange of grain for cash. For example, a farmer would agree to deliver 7,000 bushels of wheat to the dealer at the end of July for a set cost. This exchange would be beneficial for both the farmer and the dealer. The farmer would know how much wheat would be in demand so he would not come too short or have a surplus, as well as knowing how much he will be getting paid in advance. On the other hand, dealers were able to budget accordingly by knowing their costs in advance.

These contracts became very common and were even used as collateral for bank loans. But soon enough, the consequence we face with any contract arose; how do you back out if you are locked in? As a result, farmers and dealers began selling contracts before the delivery dates. For example, if the dealer still had a surplus of inventory as the new delivery date approached and he did not want to purchase the new wheat, he would sell the contract to someone who did. Or, if the farmer did not have the capability to produce and deliver the wheat, he would sell the contract and obligation to another farmer. This caused the prices of wheat to go up and down, depending on what was happening in the wheat market. Weather conditions would play a role in the pricing as well. If there was bad weather, the sellers of the wheat in the contract would hold more valuable contracts because the supply would be lower, and if weather conditions were ideal then the sellers’ contracts would become less valuable. Not everyone had a reason to buy and sell wheat, but saw this as a way to make money. It did not take long before people began to make side bets and trade these contracts, hoping to buy low and sell high, or sell high and buy low.

This concept, first developed by farmers, is mirrored in the oil industry today. Companies that have an interest in oil for their daily operations are known to participate in future exchanges, such as refineries or airline companies. Their intent is to reduce the risk of volatility in the price of oil, and are known as “hedgers.” Producers of crude oil can engage in a “short hedge,” which locks in a selling price for the oil they produce. This allows them to manage their operations to produce just the right amount to not experience a shortage or surplus. Also, similar to the farmers, it allows producers to know how much they will be getting paid in the future, which can impact key business and budget decisions. Businesses that require crude oil can participate in a “long hedge,” which will guarantee a purchase price for the commodity for a specific quantity at a specific date. Similar to the dealers involved with the wheat contracts, businesses that purchase oil will know exactly how much their oil costs will be in the future and can operate and budget accordingly.

So, if the wheat market attracted people to make side bets and trade contracts, shouldn’t the crude oil market do the same? The answer is yes. Crude oil futures are also traded by “speculators,” who make an assumption on the price risks that hedgers aim to avoid in efforts to gain a profit. In other words, crude oil futures allow you to make money of the fluctuations of the price per barrel, but are very different than buying oil or stocks of a gas company. The stock market involves trading investments in different publicly traded companies, and similarly, people also trade in commodities at financial markets. Speculators will purchase crude oil futures if they believe that the crude oil price will go up, and will sell the futures when they think the prices will fall.

Obviously, these investors have no desire to acquire the thousands of barrels of crude oil they are trading. Fortunately, participators in trading do not have to actually deal with physical deliveries if traded and finalized before the expiration date of the contracts. It is necessary to have a margin account with a broker and maintain a certain amount of equity in the account in case you experience a loss. According to Dan Caplinger, a writer and Director of Investment Planning for the Motley Fool, “For NYMEX crude oil futures, the current margin maintenance requirements range from $2,900 to $3,400 depending on the date of the contract” (The Motley Fool). If the losses result in a decrease of available capital below that level, more money must be deposited in order to keep the futures position.

Crude oil prices are important for investors in energy companies, even if the investor does not personally trade in futures. Energy companies that people invest in are likely to use futures for their own account. Knowing the mechanisms of how crude oil futures work gives you a better understanding of why the share prices of these companies are either going up or down as a reaction to the change in oil prices. For example, if a producer has sold a lot of futures that cover almost all if its future production, it should not experience that much of a reaction when oil prices change since it is already locked in. People that do not participate in futures markets will notice the volatility of oil prices as they increase or decrease and do not have the balance.

Crude oil futures play an essential role in how the energy industry operates. Future contracts will allow companies to manage their operations and potentially boost their profits by planning accordingly. However, futures markets can be very risky for investors to participate in. Understanding how futures work are not only important to companies and investors, but even average individual consumers that rely on different energy companies as their primary sources of energy. The price we pay at the pump is a reaction to how well the energy industry is doing.

Although these is no definite way to know which direction the price of oil will sway, it is possible to conduct an accurate forecast for both the short and long run. There is no hidden “secret” for how to predict the future price of oil. The balance of supply and demand causes the prices to fluctuate, but it is not the supply and demand for the actual oil. Instead, it is the supply and demand of the investment. The increase or decrease in demand in relation to the supply of investment will ultimately determine the price of oil. This is all apparent in the oil futures market where futures are traded. Investors will make a prediction, derived from different economic predictions, on whether to purchase futures that will reflect them, causing prices to go either up or down. Studying how much these future contracts are that are being traded for in the short run and in the long run will allow you to make a well-educated guess on what direction oil prices will be going.

 

https://www.fool.com/investing/2016/07/12/what-are-crude-oil-futures-and-how-do-they-work.aspx

http://www.theoptionsguide.com/crude-oil-futures.aspx

https://science.howstuffworks.com/environmental/energy/crude-oil-market3.htm

A History of Futures Trading in the United States

http://www.nasdaq.com/markets/crude-oil.aspx

How Oil Prices Impact Different Sectors

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There are few things that have a bigger influence in global markets than swings in oil prices. However, the ripple effects these swings have are hardly ever clear cut. In order to understand how swings in oil prices can influence global markets, we must first understand how these prices can increase or decrease.

Oil is a commodity that tends to fluctuate throughout time. One of the largest influencers of these fluctuations is the Organization of Petroleum Exporting (OPEC). The OPEC is an organization that includes 13 countries; Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela. According to their website, as of 2016, “81.5% of the world’s proven crude oil reserves are located in OPEC Member Countries, with the bulk of OPEC oil reserves in the Middle East, amounting to 65.5% of the OPEC total” (http://www.opec.org/opec_web/en/data_graphs/330.htm). They have production levels that meet global demand, and are able to control prices by increasing or decreasing production.

Just like the stock market, the laws of supply and demand play a crucial role for commodities as well. If supply of oil were to pass demand, the price of the oil must decrease, and if demand were to pass supply, prices will increase. For example, if there is lower demand for oil in Europe and China, but there is continuous supply of oil from the OPEC, the price of oil will fall due to the surplus of oil supply. Although supply and demand do affect oil prices, the future of oil and reserves are what actually sets the price. Future contracts allow purchasers of oil to buy at a fixed price in the future on a specific date. Other influencers of oil prices include natural disasters, such as hurricanes or earthquakes, production costs, and political instability.

Although weaker demand is what can drive prices lower, the growth rate in China, which is the world’s largest net importer of oil, has caused significant changes to the price of oil. This is due to the slowdown of growth in China. Also, the OPEC has promised to reduce its production of oil, which can drive up the demand. However, with competitors entering the market, the OPEC has kept its production levels up to compete in the market and hold market share.

For many industries in the market, oil prices are really important to pay attention to. Fluctuations in prices can have a large influence on different sectors of the economy. One of the main sectors that is highly influenced by oil prices is the airline industry.

Every traveler can agree that the cost to fly from one place to another has become a crucial factor in making the decision to travel. Like most industries, the airline industry is constantly itching to find new streams of revenue. Airfare fees used to cut it, but now surcharges have been placed on almost every bit of customer service offered by the airline company. This includes seat selection, checked bags, meals, and sometimes carry-on bags, and they are not cheap. These surcharges first began as something to depend on when fuel prices increased, as well as increasing ticket costs.

Overall, crude oil prices have significantly dropped as a result of a surplus of supply. For the airline industry, a decrease of oil prices is great news. This means that they will have lower costs on fuel, which is one of their major costs, and will potentially lead to an increase in profits. The decrease in oil prices have caused airline companies to restructure their fleets, buy back stocks to show better earnings, and also look into expanding their routes in areas that seemed less feasible. This has also benefited travelers, due to the decrease in airfare costs.

Crude prices had recovered in the first quarter of 2017. This resulted in most airline fuel costs to rise. According to Ally Schmidt, “Delta Air Lines’ fuel costs rose 26.4% YoY to $1.6 billion. American Airlines’ fuel cost rose 37.8% YoY to $1.7 billion, and United Continental’s fuel costs rose 28.1% YoY to $1.6 billion. Alaska Air’s fuel cost rose 103% YoY to $339 million, including the impact of its Virgin America merger. Southwest’s fuel cost rose 13.6% to $959 million. JetBlue’s fuel cost rose 50% to $323 million. Spirit Airlines’ fuel expense rose 62.2% YoY to $139 million” (http://marketrealist.com/2017/08/analyzing-crude-oils-impact-on-airlines-fuel-costs/).

With the news of the OPEC and a few other non-OPEC nations slowing oil production rates until March of 2018, the oil prices rose to about $51.50 per barrel (http://marketrealist.com/2017/06/how-crude-oil-prices-impact-airlines-fuel-costs/). However, the impact of Hurricane Harvey had caused oil prices to fall to $47 per barrel. The capacity Texas has of oil is about 5.6 million barrels per day, and Louisiana has about 3.3 million barrels per day. The loss faced by both of these states resulted in a decrease in crude prices.

We know an increase in crude oil prices negatively impacts the industry’s largest cost. However, a decrease in crude oil prices can also cause problems to the airline industry. Lowering the oil costs can enhance profits, but also lowers airfares. This increases demand for traveling, which forces airline companies to find ways to increase capacity. Adding too many routes or dramatically increasing their fleet can cause airline companies to hurt their potential profits when oil prices bounce back. Therefore, it is very important for them to make every move a smart one. Major airline companies have recently done a good job of finding the right balance between adding capacity and still keeping demand steady.

Another industry that is impacted by the fluctuations of oil prices is the auto industry. Automobiles and petroleum are considered to be complimentary goods, which are goods that are associated with one another. Gasoline is a petroleum-based product; therefore, price fluctuations in crude oil can directly impact the price. A fall in oil prices is great for automotive companies. This means that vehicle sales will rise, as gas prices are cheaper, and more people have leftover income to spend. The extra income that people have could be used to lease or purchase a new car. As the cost to drive becomes cheaper overall, car ownership becomes more attractive to the population.

However, the impact oil prices have on the auto industry does depend on the market and the nation. For example, people who live in high fuel-tax areas may experience an overall lower percent change in the price. Therefore, it will not appear as significant as it will to someone who lives in a lower fuel-tax area. This can change the perspective one has towards purchasing a vehicle during a time where oil prices have decreased.

Some argue that the constant volatility of oil prices causes uncertainty about if and when the oil prices will increase again in the future. Therefore, this can impact the decision-making process of an individual wanting to finance or purchase a car. This perspective suggests that the future expectations of oil prices are what reflect car sales, rather than the actual price. However, most industry experts are directly correlating an increase in sales with the recent low gas prices.

The increase of automobile sales due to lower gas prices has had a larger impact on the gas-guzzling vehicles than the fuel-efficient ones. These vehicles tend to be more expensive in general, allowing automobile companies to generate more revenue. Also, profit margins on smaller vehicles are usually less than the larger vehicles, and gas-guzzling vehicles are generally on the larger side, including trucks and SUVs.

Fluctuations in oil prices can affect many companies in different sectors. Low prices can benefit industries that rely on oil as a key input, but other industries may hurt. Upstream oil producers are the ones that take the largest hit when their costs to produce the oil passes the market price, and they have to operate at a loss. However, downstream companies can hurt as well. These include industrial producers and other companies that build drilling operations, as they support the energy sector. Also, investors that hold bonds from oil producing firms also take a hit. As mentioned, this is also true for the exact opposite; an increase in oil prices. High oil prices can significantly hurt industries, such as the airline and auto industry. However, upstream oil producers and industrial companies that support the energy sector can benefit from an increase in oil prices.

It is difficult to accurately predict what the future holds for oil prices. The U.S. Energy Information Administration predicts that crude oil prices will average $52 per barrel in 2018. The reports show that volatility will not be as bad as it was in 2016. Commodity traders are able to predict the price of oil due to their future contracts. Their predictions state that price could be anywhere from $39 per barrel to $63 per barrel by December of 2017 (https://www.eia.gov/outlooks/steo/report/global_oil.cfm). It is important to remember that any perceived shortages, such as a hurricane, can cause these traders to panic and prices to increase. However, prices tend to moderate in the long run, while heavily impacting industries in the short run.

 

Sources:

https://www.eia.gov/outlooks/steo/report/global_oil.cfm

http://www.opec.org/opec_web/en/data_graphs/330.htm

http://marketrealist.com/2017/08/analyzing-crude-oils-impact-on-airlines-fuel-costs/

http://marketrealist.com/2017/06/how-crude-oil-prices-impact-airlines-fuel-costs/

Hurricane Harvey’s effect on the Economy

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It is obvious that the tragic event of Hurricane Harvey has left thousands of families devastated, as it has destroyed billions of dollars’ worth of homes and properties. What is not so obvious, however, is the effect it will have on the U.S. economy. Although it is extremely difficult to accurately predict the impact a hurricane such as Harvey will have on the economy, economists are breaking down the impact by economic indicators.

According to the Commerce Department’s Bureau of Economic Analysis, Texas accounted for 8% of the total U.S. economic output with a GDP of $1.5 trillion in 2016. The cost of the hurricane is estimated to be somewhere between $70 to $100 billion.

Inflation is an important indicator of Harvey’s impact, exemplifies through the increase of gas prices in Houston. According to the AAA, the average gas price has increased from $2.35 to $2.66 a gallon. This number is expected to continue to increase more before settling down. The increase in inflation will have its own impact on consumer spending, forcing people to spend less money on secondary items.

Hurricane Harvey is expected to have an impact on initial jobless claims, or people filing for unemployment for the first time. Historically, we have seen an increase in claims about 2 weeks after a massive hurricane, such as Katrina in 2005 and Sandy in 2012. This could account for all the people who lost their jobs because of companies shutting down or working part time due to weather conditions.

However, at a more macro level, Harvey’s impact on the economy may not be as bad as it sounds. According to Goldman Sachs, the rebuilding of homes and properties in the future could possibly offset the damage done to the overall economy. Although in the short run it may seem harmful, in the long run, properties are going to require rebuilding. This will motivate construction companies and their workers to migrate to Houston for job opportunities.

It has only been a few weeks since the hurricane struck Houston, therefore only allowing room for predictions about the future of its economy. It will be interesting to see how the impact of this hurricane will compare to other historical hurricanes in the past. Will Harvey be the costliest? Will it have a larger negative impact on the economy, or will rebuilding efforts balance it out? We have yet to find out.

References:

http://www.foxbusiness.com/features/2017/09/07/how-hurricane-harvey-will-ripple-through-u-s-economy.html

http://www.businessinsider.com/hurricane-harvey-economic-impact-2017-8/#the-cost-of-harvey-1

 

 

 

Retail Realignment – Good or Bad?

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Having been around for centuries in the United States, the retail industry is no stranger to the economy we live in today. The industry is constantly experiencing ups and downs, depending on the styles, trends, and brands that are “in” at the moment. However, the industry is now experiencing something different – a revolutionary shift to e-commerce at a rapid pace. Recent studies show that just over half of the American population today prefers shopping online. I mean, who even likes spending hours at a mall just to find one t-shirt?According to the U.S. Bureau of the Census, as of this quarter, e-commerce retail sales make up 8.9% of total retail sales. Overall, this percentage has increased by 13.8% since 2000. As a result, retail companies are shutting down store locations, laying off employees, and some are even going under.

Just like almost any other advancement in technology, this disruption in the retail industry has had a direct effect on employment. According to The Atlantic, major department stores, such as Macy’s, have “shed nearly 100,000 jobs” from October 2016 to April of this year.

So how is it that thousands of jobs are being shed as a result of this transition, but yet we are seeing an increase in the number of jobs and wealth in America? Economist Michael Mandel believes that this shift towards online retail has actually had a positive impact towards employment. His studies show that the e-commerce market has created more jobs than the total lost jobs caused by the transition. But wait, there’s more! – These new jobs that are being created by the e-commerce sector are paying much higher wages than traditional retail jobs.

The statistics generated by Mandel assume that “general warehousing” jobs are directly correlated with retail sales. He uses the example of Amazon to justify his argument by saying that they employ 12,000 employees, which includes warehouse workers, rather than the 2,640 that the Bureau of Labor Statistics states, which does not.

Mandel might be up to something with his optimistic analysis, but it is truly very difficult to measure the direct effect e-commerce has had on employment. There are just way too many aspects, making it too complex to come to an accurate conclusion. However, it is always great to hear that we might actually be heading towards the right direction. Many people would argue – What will happen once robots start replacing humans in these warehouses? I guess we’ll just have to wait and see!

 

References:

https://fred.stlouisfed.org/series/ECOMPCTSA

https://www.bigcommerce.com/blog/ecommerce-trends/

https://www.theatlantic.com/business/archive/2017/04/the-silent-crisis-of-retail-employment/523428/

 

Social Media & the Economy

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There are billions of social media users around the world, as this number continues to increase. In 2017, almost everything is, or can be, done over the Internet; whether it is wishing your cousin in Australia a Happy Birthday, spreading awareness about your lost dog, researching about why your stomach may be hurting, or even exposing your knowledge and credibility in your craft.

Most importantly, social media has played a huge role in revolutionizing the way businesses operate. Brands are now able to expose themselves right in front of your eyes no matter where you are.

You can be in bed, scrolling through your Facebook timeline, and potentially come across an advertisement that sparks your interest. After about 4 clicks, you can purchase that product and have it arrive at your doorstep as soon as the next day. More importantly, you just generated business for that company while you were in bed.

Businesses are able to use social media to learn more about themselves. Reviews, feedback, and consumer research has never been easier, allowing businesses to spend less money on what is not working and pump more money into what is. This is so important for businesses to pay attention to and utilize, because it is something that can potentially take your company to the next level.

This magical ability through the use of social media has sparked a new wave in the economy. Entrepreneurship is at its highest peak of popularity, because now you can legitimately operate your business from your living room – all you need is a laptop.

This has even impacted the decrease of the unemployment rate. The word “unemployment” has lost a lot of its weight, partially due to the easily accessible online market places; where you can buy and sell almost any item to make money.

“Freelancers” have also gained tremendous popularity with the rise of social media. Let’s say you had enough of your boss so you quit your job, but you haven’t found a job yet, or you recently got laid off and are in the middle of a job hunt: During this time, you can now list your skills and experiences online and find contract jobs to work on for money until you find another job. This may even work out better for you, and the autonomy could be the cherry on top!

Social media has really disrupted the economy – for the better. There is so much opportunity in the world, and the Internet has literally placed it right in front of your eyes.

 

References:

http://ageconsearch.umn.edu/bitstream/162500/2/SAEA%20Econ%20Impacts%20Paper%202014%20Submitted.pdf

https://www.theatlantic.com/technology/archive/2010/10/is-social-media-driving-the-economy/64780/

https://www.forbes.com/forbes/welcome/?toURL=https://www.forbes.com/sites/quora/2017/08/02/how-does-social-media-influence-the-economy/&refURL=https://www.google.com/&referrer=https://www.google.com/