Look out below: Drilling Performance

I don’t like bringing this up, but two key metalworking markets—defense and energy—are in a bit of trouble.

The end of the wars in Iraq and Afghanistan has led to lower spending on weapons, as have cuts due to sequestration—automatic spending cuts to the U.S. federal budget, which are split roughly between defense and nondefense spending. And in the energy market, crude oil prices are the lowest they ‘ve been in 5 years, at about $46 per barrel in mid-January. This has led to sharp cutbacks in U.S. oil exploration and drilling operations.

First, let ‘s look at defense. The 2013 sequestration bill mandates $500 billion in cuts from the defense budget over 10 years. In the strange world of defense spending accounting, nothing is ever what it seems, but U.S. military spending has indeed dropped from its peak of $862.7 billion in 2011, at the end of the Iraq war, to $756.4 billion in 2014, according to a report by Kimberly Amadeo on about.com. That figure includes the Department of Defense base budget, overseas contingency funds and defense-related agencies. While lower personnel costs account for a big share of that reduction, much of it also comes out of weapons systems. Defense contractors and the shops that make their parts have been tightening their belts.

The future may not be much better. By 2050, rapidly aging populations will put an enormous financial burden on the U.S., some European Union countries, Japan and South Korea, according to “The Cost of Growing Older, ” a report by Bruce Stokes, director of global economic attitudes at the Pew Research Center, published on the Foreign Policy website. The report examines why paying for seniors’ retirement and medical costs may force the U.S. and its allies to cut military spending.

“This aging … may prove to be a problem with implications far wider than just national or even regional reach, posing profound foreign and security policy challenges and possibly undermining the ability of America and its allies to sustain current levels of military spending, ” the report stated.

Now on to the energy market. With oil prices almost 60 percent lower in mid-January than 6 months earlier, drilling budgets are being slashed. “The last time the world saw such a rapid descent was the financial crisis of 2008, ” wrote James Osborne in a report on the Dallas Morning News website. “Before that, it was 1986, when two-thirds of Texas’ drilling rigs shut down in 2 years’ time. It is a sharp turnaround for the Texas oil industry, which in just 5 years tripled its production and drove hundreds of billions of dollars into the economy. “

Suppliers have responded. Houston-based Schlumberger Ltd., a major oil field services provider, said on Jan. 15 that it will cut 9,000 jobs. At least 24,000 energy-industry job cuts have been announced in North America alone, according to a report by Christopher Helman on the Forbes website.

Our own “Manager ‘s Desk ” columnist, Keith Jennings of Crow Corp., a machine shop in Tomball, Texas, notes in his column on page 24 that many of his shop ‘s customers in the energy business are cutting back, as the rapid downturn in energy projects has created a near panic among many customers. A couple are even requesting price reductions of 25 percent.

Of course, the energy industry is notoriously cyclical, and the downturn was bound to come. But for the metalworking industry, it may be tough sledding—at least in a couple of markets—in the months to come. CTE