Americans are using less oil, 5.3% less than a year ago. That is having an impact on oil prices, when combined with the fact that post-hurricane production in the U.S. is coming back to pre-hurricane levels in the Gulf Coast. As a result, relief at the pump during a period where customers are seeing a lot of bad news about everything else.
From a high of roughly $147 a barrel, oil has slid down to just under $89, a price not seen since early last year. This has a direct effect on what you'll pay at the pump, which you may have already been noticing. Gas is down to a national average of $3.447 a gallon. Experts believe it may edge back down to the $3 a gallon area.
The reversal is striking enough that OPEC is having an emergency meeting to figure out how to handle the slide in prices and how to shore it back up, though so far their production cuts haven't halted the change.
The global slowdown is helping this slide, however when and if economies begin to stabilize, one should expect to see prices start a regular march upward once more.
It seems like there is always something to worry about these days. Over the summer, the economy was showing signs of what was to come, but the main concern on most of our minds was not the overall economy. Instead, we were worried about the $4 gasoline that we were pumping into our cars.
Now, the tables have turned, and all we are thinking about is the crashing economy. But at least we can take a little pleasure out of the fact that gas is falling, and should continue to drop.
It wasn't that long ago that we were feeling the full brunt of record high gasoline prices. It was July 17, in fact, when the national average hit its peak of $4.114 a gallon. While prices are still running at historically high levels, they have come well off their summer highs, and are currently sitting at an average of $3.48 a gallon nationwide for regular unleaded. A pretty nice pullback, to say the least.
One of the main things that was on most of our minds this summer was the record high gasoline prices that gripped the nation. While prices are still very high on a historic basis, the past month has seen a nice drop in prices, and given drivers a bit of relief when they pull into their local gas stations.
According to AAA, gasoline prices fell again today, currently down to $3.683 a gallon for regular unleaded, still pretty high, but much lower than what we were seeing in the middle of summer.
Prices set a high on July 17, with the national average for gasoline going for $4.114 a gallon. While we are all relieved to see prices off their highs, they are still well above where they were at this time last year, when the national average was down at $2.81 a gallon, 31% lower than the current price.
We can all sense it even without looking at the numbers -- gas prices rose very quickly when oil prices had their huge run-up, but since oil prices started falling, gas prices didn't match the declines. Indeed, since oil reached its record price of $147.27 a barrel on July 11, it dropped over 26% to around $107-108 today. Gas prices peaked at $4.14 a gallon on July 17, but have fallen only 10% since. Comparing weeklydata from the EIA shows a similar, if less extreme, picture. Why is that?
Economists differ in their views of why this asymmetric pricing happens. In the case of gasoline, it seems to be the "fault" of the consumer. Since information about oil prices is readily available, consumers know what to expect even before they go to the pump, therefore behaving differently during times of rising and falling oil prices. This, in turn, limits or allows for larger gasoline price changes.
During times of rising oil prices, consumers are very price conscious and shop for deals. Sure, since gas stations take delivery often, they'd be eager to pass on the price increases to consumers immediately. But as most consumers comaprison shop, gasoline retailers are limited by the amount they can hike up prices.
Beyond the torment it has already caused in the Carribbean and the stress it places on those who are evacuating the Gulf Coast, hurricane Gustav will lead to higher prices at the pumps. That's because the majority of the Gulf of Mexico's oil production is shut down in anticipation of Gustav's force.
Exactly how much production is being shut down? CNNMoney reports that "energy producers have shut in approximately 77% of oil output and 37% of natural gas production in the Gulf of Mexico." This is affecting three producers particularly hard -- Royal Dutch Shell PLC (NYSE: RDS.A), BP PLC (NYSE: BP) and Chevron Corp. (NYSE: CVX).
And the production shut-down is significant -- "nearly 1 million barrels of daily oil production is now shut down. The last time this happened was in November 2005, after Hurricanes Katrina and Rita. In addition, 2.75 billion cubic feet of daily natural gas production is now shut down" according to CNNMoney.
No one wants to own a gas station; the margins are too small. Consumers will only pay so much for petrol. If the price moves up, people begin to ride bicycles.
ConocoPhillips (NYSE: COP) will sell the last 600 stations it owns, walking away from a business that Exxon Mobil (NYSE: XOM) left just a few months ago. According toThe Wall Street Journal, "ConocoPhillips is expected to sell the remainder of its 600 company-owned gasoline stations to closely held PetroSun West LLC for $800 million."
The announcement says a great deal about the perverse economics of the oil business. Due to the recent rise in oil prices, pumping oil out of the ground is an excellent business. The profits on $120 crude are stupendous. But the refining industry is awful. Trying to make margins on the gas and diesel from that high-priced oil is extremely difficult. Demand gets hammered by the consumer's inability to absorb the huge increase in fuel prices.
The question, of course, is why any company would get into the business. That says a great deal about the big oil company strategy of dumping stations. Either the people buying them are fools, or the profits in the sector will come back as gas prices drop. If so, Big Oil will look silly.
Douglas A. McIntyre is an editor at 247wallst.com.
Gas prices dropped another 15 cents over the last two weeks. That news sounds good, but it really isn't. Gas is still much too high and is staggering compared with a year or two ago. According to the AP, a gallon of regular is down to $3.70, and premium is $3.95.
While the improvement would seem to be good for the economy, gas prices are still just too high. Filling the tank on an SUV or pickup is probably a $70 ticket. Even a small, fuel-efficient car can't stop at a service station for much less than $30.
The media reports on gas prices are misleading. They are about the modest drop in costs but fail to look at the numbers relative to the period when a gallon was $2. In some parts of the U.S., prices were that low in early 2007.
It is unlikely that falling gas prices will do much to improve consumer economics until the register reads under $3. Until then, the consumer will stay pinched and won't be over at the mall buying new clothes.
Douglas A. McIntyre is an editor at 247wallst.com.
T. Boone Pickens does not care if the price of oil is falling. His opinion is that most of the drop is over and that his plan for wind energy is still viable and necessary for future U.S. independence from crude imports.
Pickens could not be described as faint-hearted. Rumors are that his $7 billion BP Capital hedge fund took a 35% haircut in July by betting the wrong way on oil and gas. It is a paper loss, but must sting nonetheless.
Some argue that Pickens is old and monumentally rich so gambles on wind and oil don't mean much for his own fortune. That could indicate that his conviction about wind-powered energy is not based on greed. Since he has spent his life aggressively accumulating wealth, that is not likely.
What is likely is that he thinks oil prices may stay very high and that his alternative energy will do remarkably well because it is infinitely renewable. If so, it is too bad his hedge fund cannot invest a few billions into wind technology. He can't afford another 35% loss. At some point his convictions may put him in the poor house. At least as it would be viewed by a billionaire.
It is a perverse bit of news: Americans are spending more on gas than on cars. Bloomberg writes that "Gasoline accounted for about 4.4 percent of spending in June, compared with 3.9 percent for autos and motor parts, according to the U.S. Bureau of Economic Analysis."
This is a tragedy for the auto industry as much as it is the sign of a self-inflicted wound. It also says the car business is not likely to recover soon.
The domestic car industry may produce only about 14.5 million unit sales this year. That may mean that almost no individual company will have a profit. By some estimates, vehicles sales could drop to 13 million next year. If oil stays around $120, gas will probably not drop much below $3.50.
What the news says about the consumer is frightening and goes well beyond car sales. If a typical household cannot afford a new car and gas for a year, then many households are probably on the edge when it comes to mortgage and food costs, especially as home loans continue to reset to higher levels. As the economy loses jobs, more people will not be able to cover either car payments or gas.
The statistics on cars are more than a forecast for the industry. They are a harbinger for the broader economic health of the country.
Douglas A. McIntyre is an editor at 247wallst.com.
Americans drove 12.2 billion miles less in June than they did a year ago, according to the Federal Highway Administration.The number is too big to fathom. It is probably like driving to the Moon and back 876 times, or some other absurd analogy.
What is certain is that the trend puts a downward pressure on gas prices and could be a factor in per gallon costs going back toward $3. For any company in a business that relies on drivers, though, the driving less trend is bad news.
Hotel and motel company stocks are likely to get hit fairly hard because drivers are staying off the road. It probably does not help fast food places like McDonald's (NYSE: MCD) either. Retailers, including Wal-Mart (NYSE: WMT), are certain to be hurt, but online shopping at retail websites may soften that blow.
Of course, car companies get hammered. People who don't drive don't need new cars. Operators of oil change outlets will probably have a bad year. The same holds true for tire companies.
Put another way, the economy might be better served if drivers would get back in their cars.
Douglas A. McIntyre is an editor at 247wallst.com.
With a turn of the calendar page, we drift into the middle portion of the current quarter, but the earnings season rolls on. Among the many companies scheduled to report quarterly results this coming week are Time Warner Inc. (NYSE: TWX), Cisco Systems Inc. (NASDAQ: CSCO), News Corp. (NYSE: NWS), and Whole Foods Market International (NASDAQ: WFMI). Let's take a look at which companies Wall Street analysts are expecting to be among the top earnings gainers and decliners this week.
Analysts surveyed by Thomson Financial expect the following to report strong earnings growth when compared to the same period of the previous year.
During July, the prices of oil exploration and coal stocks mentioned in my newsletter tumbled precipitously. For example, Arch Coal (NYSE: ACI) and Peabody Energy (NYSE: BTU) lost roughly a quarter of their value by the end of July and Ultra Petroleum (NYSE: UPL) and Southwestern Energy (NYSE: SWN) which had been up over 40% through June ended July up a relatively paltry 4% and 11% respectively.
I find this interesting because it violates one of the basic theories I have about what moves stock prices. This beat-and-raise theory says that if a company beats earnings estimates and raises its guidance, then the stock will rise. Otherwise it will fall. In the case of these four companies, each of them with the exception of Ultra which did not report, reported doubling or tripling of earnings and raised their guidance.
So why did their stocks fall? In the case of the oil and gas companies, it could be because of declining oil prices. Those peaked at $146 a barrel and recently traded at $127. But I am not aware of any diminution in the price of coal for which demand is strong due to Chinese and Indian infrastructure investment among other factors. Coal is used to make steel and to fire up power plants.
Exxon Mobil Corp. (NYSE: XOM) today posted yet another record profit. The problem is that the results were not as fabulous as Wall Street expected.
Net income at the world's largest oil company surged 14% to $11.7 billion, or $2.22 a share, from $10.3 billion, or $1.83, a year earlier, the Irving, Texas-based company said in a statement. The results, which broke the company's previous record, trailed Wall Street expectations by a whopping 26 cents, according to Bloomberg News. They trailed the Thomson Reuters forecast by 25 cents. Revenue rose 40.4% to $138.07 billion.
The earnings were a mixed bag. The upstream business jumped 68%, while liquid oil volumes fell and natural gas production declined. Slumping margins pushed down profit at the downstream business by 54% and 32% in the chemicals business, according to The Wall Street Journal.
Even though Exxon Mobil is rolling in money, it's spending quite a bit of it as well.
With crude oil trading down to $126 a barrel, though some are still touting the price is moving to $200, or even $300 a barrel, it actually looks more like it is heading to at least $100 barrel. With growing sentiment in Congress, even among mainstream Democrats, to accept President Bush's proposal to do more drilling, the market has taken this as a signal that the government is serious about taking action to bring down prices at the pump. If the Democratic leadership would get on board, the current drop in crude prices would be nothing compared to what could happen.
Coupled with projected slower growth in emerging markets, most notably China, where we could see GDP growth slow by more than 2%, why should the price keep moving higher?
it's important to note that the decline we have witnessed over the last few weeks should result in a drop of over 50 cents a gallon at the pump. Coupled with people driving less, thus easing the demand, the increased supply, or the potential of increased supply on the market should help keep prices moving down.
Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer's fund has no position in any stock mentioned, as of 7/23/08.
Republicans and my colleague Aaron Katsman are trying to blame Democrat Barack Obama for rising gas prices. This is election-year politics at its worst.
For one thing, as the Washington Post and other independent observers note, drilling for more oil will do little to alleviate the pain U.S. drivers are feeling at the pump. The available supplies are probably not going to make much of a dent in our never-ending thirst for the black gold. Remember, the oil may not be as easy to get or cheap to process.
"Drilling off the coasts would increase U.S. oil production but have no short-term impact on gas prices," the Post says. "While some analysts disagree, an Energy Department report last year said production would not start until 2017 and have no 'significant' effect on prices or supplies until 2030."
An even more ridiculous idea floated by Republican John McCain is the so-called gas tax holiday, which has been roundly denounced by economists and Obama as a dangerous economic gimmick. Experts estimate that it would save the average consumer a whopping $30.
It seems like there is always something to worry about these days. Over the summer, the economy was showing signs of what was to come, but the main concern on most of our minds was not the overall economy. Instead, we were worried about the $4 gasoline that we were pumping into our cars. 
We can all sense it even without looking at the numbers -- gas prices rose very quickly when oil prices had their huge run-up, but since oil prices started falling, gas prices didn't match the declines. Indeed, since oil reached its 
Beyond the torment it has already caused in the Carribbean and the stress it places on those who are evacuating the Gulf Coast, hurricane Gustav will lead to higher prices at the pumps. That's because the majority of the Gulf of Mexico's oil production is shut down in anticipation of Gustav's force.
With a turn of the calendar page, we drift into the middle portion of the current quarter, but the earnings season rolls on. Among the many companies scheduled to report quarterly results this coming week are 
Exxon Mobil Corp.
Republicans and my colleague 
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