That is the relevant question.
Here's my opinion. I think this will be more about perception and a shaving of profit margins anywhere around the current price. I don't think a 15% increase in the price from here is a deathblow to the consumer by any means. It costs me $27 to fill up my 4Runner and I have to fill it twice a week because I drive to Phoenix twice a week. A 15% price increase at the pump from here would cost me $8.10 per week. How much would it cost you and would that change much in your financial life? While it does matter for some folks there are plenty of people that can absorb an increase just fine.
Living out west I have no frame of reference for home heating oil. We have propane and our annual cost (I live on a mountain that gets a lot of snow) is between $600 and $700 a year. A 25% increase in the price from here would merely be a nuisance for the month I have to pay the bill but not change my consumption habits. I can't say the same if I lived back east and needed to cough up an extra $1000 for heating oil.
I think oil creates more of a problem for public companies. It seems easy to figure that companies that have heavy energy demand usage will have problems with profit margins or having to reduce earnings guidance. I think that either the perception or the reality of this development could be a sizable negative for stocks but I do not yet have a feel for the time line for this to occur. Will it be evident with 2Q earnings? 3Q? Another time?
Also compounding this effect for certain stocks could that oil has gone up with the dollar so other countries are feeling this last leg up much more than they felt oil going from $40 to $50.
I certainly don't have all the answers but I remain overweight energy and would not rule out adding a little more to the sector soon.
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5 comments:
Roger,
the US still lives a wonderful dream. Oil for you is still extraordinarily cheap. 27$ for your 4x. In Europe you would have to pay about 5 times this amount and any increase in Oilprices means it just get more expensive to drive. In Germany we pay 1.28 Euro / litre or around 6$ / Gallon (I think it's 3.8 litre = 1 Gallon). Heating makes about 10% - 15% of the monthly living cost depending where you live. Until today the US taxman has not seen the need or has not gotten the necessary backing to increase taxes on oil. In Europe taxes on oil make about 78% of the price and with every cent the price of oil goes up, the state gets about 0.78 cent more taxes.
So, if you think about european companies making more money or the european customer spending more then what is necessary. Forget it. At the moment any surplus is paid for oil and the rest goes into the savings account.
“It seems easy to figure that companies that have heavy energy demand usage will have problems with profit margins or having to reduce earnings guidance.”
I agree with you there – if I were an investment professional looking to short some stocks, I’d keep a close eye on chemical companies (DOW, for example), trucking (YELL, for example), and airlines (NWA, for example). At some point, the front month price of oil will reach an inflection point where companies heavily dependent on oil usage will have to raise their prices if they can’t hedge profitably to reflect the perception that oil prices are going nowhere but up.
Here’s what I’d like to see, though – why doesn’t the US government start quietly selling oil from the Strategic Reserve in the open market? Think of the money it could get to help pay down some of our trade deficit (caused in part by oil imports, of course…)
I may be incorrect with the following number but I am quite certain that the SPR is not even a weeks worth of the total world demand for oil. Whether that is correct or not I do know that the SPR is so small relatively, speaking it is too insignificant to adressing the problem.
Roger,
For you, me or most of the people who read your Blog I doubt it affects them very much. But how about the majority of Americans who have no savings, maxed out credit cards, and live paycheck to paycheck? If you use your credit card at the pump you miss seeing all of the people at the cashier inside who only have cash for $5 or $10 worth of gas. Or if they do use their credit card, it might take them closer to their limit and stop some other spending. Watch for it and you might notice this behavior; someone pointed this out to me over a year ago and I have.
An additional thought here might be what will happen if oil supply really does reach a peak, even if just temporarily, and the demand in China, India, and the rest of Asia continues to grow at its current rate? More than just price, what would happen if we as a country could not import enough oil and /or refined fuel? I am heavy into oil stocks and looking into replacing one of my cars with a Hybrid Accord. Not that I’m hard core environmentalist, I just want a long range cruising option. I’m still going to keep my old gas guzzling Porsche, but just drive it less and less!
Jim in LV
If we all stop filling our tanks and taking all this gas off the market, the price of gas would drop soon. Full tanks on our cars just assures that the Arabs will have your dollars in advance of what is neccessary. Just buy a 2-3 day supply at a time!
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