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Falling oil prices both good and bad for manufacturers

Oil drilling rig in Bakken oilfields of Williams County near Ray, North Dakota.Oil drilling rig in Bakken oilfields of Williams County near Ray, North Dakota.
Frack, and frack again, CuadrillaPhotograph by Richard Hamilton Smith—Gallery Stock

For manufacturers, the recent tumble in oil prices is a mixed bag, a report released Friday suggests.

On one hand, a steep decline in the cost of oil leads to lower expenses. But on the other, business may suffer because of lower spending by oil and chemical companies on big-ticket items like computers and new machinery.

The monthly report by the Institute for Supply Management, a not-for-profit educational association, shows that the manufacturing sector expanded for the nineteenth consecutive month. Meanwhile, the overall economy has expanded for the sixty-seventh month in a row.

The report, based on data collected from U.S. supply chain executives, concludes that 11 of the 18 manufacturing sectors grew during December.

Brad Holcomb, the chair of the Institute for Supply Management, said the December report marked a strong showing leading into 2015. It’s “quite solid and a good way to put 2014 in the drawer,” he told Fortune.

The report’s findings come as a barrel of crude oil closed down 1% for $52.69 a barrel Friday, the lowest finish is more than five years. Prices have fallen nearly 50% since their peak in 2014.

Comments from manufacturing executives in the report show the dual impact of the decline. They also highlight the complexity of their business beyond the uni-dimensional view that low fuel prices are always good for business.

Holcomb highlighted, however, that the falling prices may be both good and bad.

“The blessing is that raw materials prices are lower and, any time that occurs, margins open up for manufacturers,” he explained. “The second aspect of the blessing, besides lower raw material prices, are the plants take a lot of energy to run.”

“On the flipside, in those specific industries like the chemical industry or petroleum and coal products, they’re getting hit directly,” he said, citing the resulting impact on their spending. “That’ll be the curse.”

Holcomb told Fortune that it’s atypical to have so many comments centered around oil prices, with the last time being a few years ago when crude oil prices also plunged. The four sectors that the report highlighted include petroleum and coal products, chemical products as well as apparel and leather goods.

Oil prices isn’t the only concern among executives, Holcomb said. Some spoke about troubles getting imported materials because of a slowdown by West Coast dock workers.