Yesterday I spent more than I ever have to fill up my gas tank -- $65!! Based on this report of record gas prices, I know that I am not alone. Are you fed up about this? If so, read on to find out why it's happening and what you can do about it.
I think I was relatively lucky to spend "only" $3.17 a gallon for mid-grade. And I remember spending about $3.25 a gallon after Katrina, so I know that this is not the highest price per gallon that I've ever paid. I just filled up twice -- a little the first time and a lot the second after a long drive. But what really fries my circuits is that I spent $2.11 a gallon in February, a 50% rise in three months!
So what is driving up the price? How can you hedge against higher prices? The answers: 1) demand (gasoline consumption) is growing faster than supply (refining capacity), and 2) consider buying stock in Valero Energy Corp. (NYSE: VLO). Demand is expected to rise -- AAA estimates that 38.3 million will travel 100 miles or more over the Memorial Day holiday, up 1.7% from 2006. And most of those -- 32.1 million -- will be driving on their trip.
The supply of refining capacity is not rising as fast -- since 2001, refining capacity utilization has risen from 82% in to 89% in April 2007 -- coupled with an unusually large number of refineries taken off line for "seasonal maintenance." So prices at the pump have risen from $1.49 a gallon the week before Bush took office -- 47% of the maximum price -- to $3.15 during the week of May 14, 2007-- which is the highest price ever.
VLO is a good hedge for rising gasoline prices since it's benefited from this trend. VLO is up 750% since Bush took office, compared to a 13% increase in the S&P 500. Its net profit margin has risen from 2.3% at the end of 2000 to 6.4% in the last year. The key issue for VLO is its valuation. It trades at a P/E of 8 but its earnings are expected to decline 12% in 2008 from $8.48 this year to $7.46 next.
How do you feel about record gas prices? What are you doing about them?
Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Valero.
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Reader Comments (Page 1 of 1)
5-21-2007 @ 12:07PM
Yossi said...
GAS WAR - an idea that WILL work
This was originally sent by a retired Coca Cola executive. It came from one of his engineer buddies who retired from Halliburton. It's worth your consideration.
Join the resistance!!!! I hear we are going to hit close to $4.00 a gallon by next summer and imight go higher!! Want gasoline prices to come down? We need to take some intelligent, united action. Phillip Hollsworth offered this good idea.
This makes MUCH MORE SENSE than the 'don't buy gas on a certain day' campaign that was going around last April or May! The oil companies just laughed at that because they knew we wouldn't continue to 'hurt' ourselves by refusing to buy gas. It was more of an inconvenience to us than it was a problem for them.
BUT, whoever thought of this idea, has come up with a plan that can really work. Please read on and join wi th us! By now you' re probably thinking gasoline priced at about $1.50 is super cheap. Me too! It is currently $2.79 for regular unleaded in my town. Now that the oil companies and the OPEC nations have conditioned us to think that the cost of a gallon of gas is CHEAP at $1.50 - $1.75, we need to take aggressive action to teach them that BUYERS control the marketplace..... not sellers. With the price of gasoline going up more each day, we consumers need to take action. The only way we are going to see the price of gas come down is if we hit someone in the pocketbook by not purchasing their gas! And, we can do that WITHOUT hurting ourselves. How? Since we all rely on our cars, we can't just stop buying gas. But we CAN have an impact on gas prices if we all act together to force a price war.
Here's the idea:
For the rest of this year, DON'T purchase ANY gasoline from the two biggest companies (which now are one), EXXON and MOBIL. If they are not selling any gas, they will be inclined to reduce their prices. If they reduce their prices, the other companies will have to follow suit.
But to have an impact, we need to reach literally millions of Exxon and Mobil gas buyers. It's really simple to do! Now, don't wimp out at this point.... keep reading and I'll explain how simple it is to reach millions of people.
I am sending this note to 30 people. If each of us sends it to at least ten more (30 x 10 =3D 300) ... and those 300 send it to at least ten more (300 x 10 =3D 3,000)...and so on, by the time the message reaches the sixth group of people, we will have reached over THREE MILLION consumers. If those three million get excited and pass this on to ten friends each, then 30 million people will have been contacted! If it goes one level further, you guessed it..... THREE >>>>HUNDRED MILLION >>>>PEOPLE!!!
Again, all you have to do is send this to 10 people. That's all. (If you don't understand how we can reach 300 million and all you have to do is send this to 10 people.... Well, let's face it, you just aren't a mathematician. But I am, so trust me on this one.)
How long would all that take? If each of us sends this e-mail out to ten more people within one day of receipt, all 300 MILLION people could conceivably be contacted within the next 8 days!!!
I'll bet you didn't think you and I had that much potential, did you?
Acting together we can make a difference. If this makes sense to you, please pass th is message on. I suggest that we not buy from EXXON/MOBIL UNTIL THEY LOWER THEIR PRICES TO THE $1.30 RANGE AND KEEP THEM DOWN.
THIS CAN REALLY WORK.
5-21-2007 @ 12:55PM
Jeff said...
That idea will not work. Your friend isn't a CEO, and if he was, he should be fired. Go to snopes. Read about how incredibly flawed that plan is. Tell your imaginary CEO friend to do the same.
5-21-2007 @ 4:12PM
w Markham said...
If you want to solve the gas price situation, just buy oil stocks and stop complaining.Ethanol is too expensive to produce and you are paying a subsidy tax right now of 59 cents per gal., so enjoy buying gasoline.