If You Want to Play This Industry, Don’t Do it in America

by David Fessler, Energy and Infrastructure Expert

Friday, August 27, 2010: Issue #1333

Despite boasting just 5% of the global population, the United States goes through 25% of the world’s oil every year.

That startling statistic is no secret – and it’s entirely understandable. After all, much of it relates to Americans’ love affair with their automobiles – one that dates back well over 100 years.

And our gas-dependent ways have only increased over the past 15 years or so with the increasing popularity of large, powerful cars, SUVs and trucks.

But the recession hit the auto industry hard. Truck and SUV-loving consumers drifted away from dealerships in droves. And the recession has dragged gasoline prices down, too.

Today, U.S. gasoline usage is still languishing and prices are trending lower. And while that’s a big problem for one U.S. industry, in particular, the story is very different overseas. Let’s take a look…

The End of Cheap Gasoline

Back in the summer of 2007, U.S. gasoline usage peaked, as we sucked up 400 million gallons a day.

But according to the Energy Information Administration, we’ve only averaged 372 million gallons per day over the past six months – a 7% decline from 2007.

Many experts believe fuel demand will continue its downward trend, due to the following factors:

Car-buying attitudes are changing, too…

Cheap Gasoline Prices Are History

When I started driving in 1969, gas stations would give away baseball trading cards, glassware, or china, all for just a $5 fill-up. Back then, gasoline was chump change at just $0.29 a gallon.

Even throughout the 1990s, gas only averaged $1.11 a gallon. But as the global economic focus slowly shifts from the United States to China, oil demand and prices have surged, meaning the cheap gasoline prices Americans enjoyed for nearly a century are quickly being relegated to the history books. Today, the new “normal” seems to be around $3 a gallon.

History shows that when American consumers are faced with spending more than 3.5% of their disposable income on gasoline, they change their attitudes and habits in order to spend less. And $3 gasoline has an amazing ability to change people’s minds.

So Americans’ love affair with the V8 has morphed into a desire for greater fuel efficiency and value. Nearly every carmaker on the planet is scrambling to offer gas-stingy models and new carbuyers are snapping them up in increasing numbers.

In addition, greater environmental awareness has led to a gradual rise in natural gas and electric-powered vehicles. And while the electric vehicle market is still in its infancy, give it a few years and its effects will drop the demand for gasoline even faster.

What does it all mean? A slow, painful death for this industry…

U.S. Oil Refiners Ravaged

For publicly traded U.S. oil refiners focused on the domestic market, the rise of global oil prices and decline of U.S. gasoline usage has hammered their market. Many refining stocks have lost 75% of their value since 2007.

But the carnage isn’t over by a long shot. Companies like Sunoco Inc. (NYSE: SUN), Valero Energy Corporation (NYSE: VLO), Frontier Oil Corporation (NYSE: FTO), Holly Corporation (NYSE: HOC), Western Refining, Inc. (NYSE: WNR), and Tesoro Corporation (NYSE: TSO) are all faced with a declining market for their products.

At the same time, they’re also faced with having to pay more for crude oil. It’s a potent mix that’s destined to lead to lower profit margins, as prices rise and demand declines. Why?

Double-Dip Recession Means Double Trouble for U.S. Refiners

Because the United States is teetering on the brink of a double-dip recession. Unemployment remains above 9% – and it will likely stay there for several years. As a result, domestic demand for gasoline continues to weaken.

The resulting excess refining capacity will continue to hammer domestic refiners’ balance sheets for years to come. Refining plants are meant to operate continuously for years at a time. They’re very expensive to start up and shut down.

Other companies such as Exxon Mobil Corporation (NYSE: XOM) and Chevron Corporation (NYSE: CVX) aren’t in the same boat as the refiners I noted above, as they’re more diversified and therefore less dependent on the U.S. gasoline market. They have international exploration and production operations, as well as exposure to natural gas and chemicals.

And speaking of the international climate…

Head Overseas to Play the Gasoline Boom

Unlike in the United States, demand for gasoline is on the rise in places like China, India and other emerging markets. Many newly affluent middle-class citizens in these countries are only now discovering the joy and freedom that car ownership brings.

Not only will this help ExxonMobil and Chevron’s globally diversified businesses, it’s also a boon to companies like China Petroleum and Chemical (NYSE: SNP) and Brazil’s Petrobras (NYSE: PBR), the latter of which is Latin America’s largest company by market cap and the world’s fourth-largest energy firm. (By the way, I profiled Petrobras in more detail here a month ago.)

If you want to play the global economic growth of the fossil fuel refining sector, steer clear of companies that don’t have international exposure. They’re destined to produce lack-luster results (or worse) for years to come.

Good investing,

David Fessler