President Bush drew a bit of flak last week when he said of his tax-cut plan, "If I had my way, I'd have it in place tomorrow, so people would have money in their pockets to deal with high energy prices."
Critics said that he was just looking for a new excuse for lowering taxes now that his old one -- that the economy was on the verge of recession -- didn't look so sound. And they said tax cuts seemed a dub[ya]ious way of dealing with high pump prices, since it would indirectly send more money to the
ExxonMobils (XOM Quote - Cramer on XOM - Stock Picks) of this world.
Yet buried in all the rhetoric, there was a point worth making. Gasoline prices have reached their highest levels ever in recent weeks. And if the economy is really set to rebound, those prices aren't going to be falling anytime soon. That probably means good things for oil refiners and bad things for just about everyone else in this economy.
Soaking
This isn't the way it usually works. Usually, when the U.S. economy cools, demand for gasoline goes down and with it, pump prices. By the time the Fed starts cutting rates, the cost of a gallon of unleaded is pretty well contained. When the Fed first cut interest rates back in January, however, that wasn't the case. At $1.47, a gallon of unleaded was just 18 cents off its highs of the summer and 17 cents higher than it had been a year before. The problem, explains
J.P. Morgan equity strategist Doug Cliggott, was that "there was a profound lack of investment in energy infrastructure over the last 10 years."
Pumped
Average cost of a gallon of unleaded |
 |
| Source: Oil Price Information Service |
Capacity at refiners in particular hadn't been added quickly enough to keep up with economic growth. As a result, even when the economy moderated, demand growth was still outstripping supply increases. In January, the refiners were running at a fairly high 93.5% of capacity. Refining margins -- the difference between the cost of crude and the cost of gasoline -- were also on the high side. Since then, things have only gotten more strained. In April, refiners were at 96.4% of capacity and margins reached the highest levels that
Salomon Smith Barney's energy analysts have on record. The average price of a gallon of gas in the U.S. climbed to $1.70, breaching $2 in parts of California.
"We haven't seen any diminution in gasoline demand due to these higher prices," notes
Fimat U.S.A. senior vice president of energy risk management John Kilduff. That suggests that much of current demand is systemic -- people buying gasoline to do the things they need to do -- rather than discretionary. That means that as the economy begins to gain traction, pump prices could go higher still. "Anything that spurs consumers to hit the road is going to stress the tight gasoline inventories that we're seeing," says Kilduff. "There's no real relief in sight now."
Catbird Seat
Refiners -- outfits like
Sunoco (SUN Quote - Cramer on SUN - Stock Picks) and
Ashland (ASH Quote - Cramer on ASH - Stock Picks) -- could be in something like the catbird seat. Even if they see a pickup in demand, their cost for crude may remain relatively contained. Although many economists believe the U.S. is poised for recovery, Europe's economy is weakening. Japan's protracted slump has left Asia without its traditional economic driver.
Gushing
Refiners' capacity utilization |
 |
| Source: Federal Reserve |
"Globally, you're going to have energy demand weakening further," says Ethan Harris, economist at
Lehman Brothers. "The U.S. is going to recover, but I don't think that's enough to matter for the trade of internationally traded energy products -- oil, basically." Gasoline, however, is generally not an "internationally traded energy product." Because of regulatory differences, refining is a localized affair. If there is excess refining capacity in Asia, it really doesn't help us -- we can't use their gas.
It will take time for U.S. refinery capacity to meet demand. There is no magic wand that can be waved to instantly put more refiners on line or to make Americans trade in the trucks they call cars for more modest vehicles. High gasoline prices aren't going away anytime soon. J.P. Morgan's Cliggott thinks that investors should be "uncomfortably overweight" refiners. This goes against conventional wisdom, which says that as the economy picks up, you should buy things like retailers because consumers are going to be flush again and spending freely at the stores.
But the way things are set up, a lot of that money could be going right into the gas tank.
Justin Lahart
RSS
