Gasoline Hangover

Partying like it's 1999 can result in a nasty hangover. You wake up the next day wearing lipstick and claiming you'll never drink again. The hangover hurts, but it's quickly forgotten. Just a few months later, there you are, wearing a bra over your Detroit Lions jersey and screaming "tequila shots."

The American consumer is still suffering a costly hangover from high gas prices resulting from hurricanes Katrina and Rita and has taken action. Bicycle sales are up. Year-over-year gasoline consumption dropped 2.3% in September. High prices have hit where it hurts -- in the wallet -- and people are starting to conserve. But have we really learned our lesson? When gasoline prices return to pre-hurricane levels, are we going to continue to reduce consumption? The short answer is no. Once the hangover ends, gasoline consumption will come roaring back; therefore, I feel that energy stocks continue to be good investments going forward.

Let's update the effect the hurricanes continue to have on refining capacity. Even with headline news of Katrina and Rita fading into the past, eight refineries with more than 1.85 million barrels per day (bpd) of capacity remain shut down, with several others running at reduced rates. This is more than 10% of U.S. refining capacity. Before the hurricanes, plants were running at 95.8% of capacity.

The good news is that in October, as much as half of this shut-down capacity will start to return. Chevron (NYSE: CVX  ) announced last week that it has initiated a start-up of its 325,000 bpd refinery in Pascagoula, Miss., which was heavily damaged by Katrina but could resume normal operations by the end of October. Refineries in Lake Charles and West Lake, La., and Port Arthur, Texas, operated by Venezuelan-owned CITGO,ConocoPhillips (NYSE: COP  ) , and Valero Energy (NYSE: VLO  ) , respectively, have also begun their start-up. ExxonMobil's (NYSE: XOM  ) Beaumont, Texas, facility, and Motiva and Total SA's (NYSE: TOT  ) Port Arthur facilities are shut down but have restored some power and are in various stages of returning to service after Rita. This will go a long way toward easing pump prices back below pre-hurricane levels.

The bad news is that as much as 750,000 bpd of capacity will remain out of service for an undetermined amount of time. Katrina left major damage at ExxonMobil's and Citgo's Chalmette, La., facility, Murphy Oil's (NYSE: MUR  ) Meraux, La., facility, and ConocoPhillips' Belle Chasse, La., facility. In addition, the majority of BP's (NYSE: BP  ) Texas City, Texas, facility remains shut down, not because of hurricane damage, but because of safety problems that resulted in a $21 million fine against BP. Of these four, ExxonMobil estimates that the Chalmette facility could resume partial production by mid-November, and ConocoPhillips estimates that the Belle Chasse facility could resume partial production in December, with full production resuming early next year. Murphy Oil and BP have no timetable for when production at the Meraux and Texas City facilities will resume.

On the oil front, production in the Gulf of Mexico is slowly returning; 70.8% of production remains shut in, compared with 95% two weeks ago. As production returns, oil prices continue to fall, with crude oil futures down 6.6% and gasoline futures down 14.4% last week alone (retail gasoline prices fell only 2.7%). Our "friends" at OPEC are also helping, agreeing to lift quotas for a three-month period starting Oct. 1.

At first glance, the picture looks pretty good. The American consumer has eased off on the gas pedal, refineries are returning to service, and crude prices are falling. Pretty soon, we will be able to celebrate gas prices dropping back to $2.50 a gallon.

Yet I return to my question: Have we learned our lesson? Unfortunately, I'll bet that Americans will behave like college students at a frat party, quickly forgetting the pain of the hangover. It's not their fault, however. The problem is that nothing structurally has changed. U.S. refineries will continue to operate at more than 90% capacity for years. Legions of urban workers will continue to live in suburbs, driving gas-guzzling SUVs for an hour and a half each day. The vast majority of cities, suburbs, and towns do not offer bike paths, sidewalks, or other infrastructure to make biking or walking realistic alternatives. The average American car still gets only 20 miles per gallon, and, as my biking friend Seth Jayson recently pointed out, even at $3.00 a gallon, the savings on gasoline do not justify buying a new vehicle.

I'm looking at the current sell-off in the oil patch as a potential buying opportunity. Very little has changed in the U.S., and there are still a few hundred million people in India and China who want modern, hydrocarbon-powered lives. Unless the high prices trigger a worldwide recession, additions to production, distribution, and refining capacity will only match the growth in demand for the foreseeable future.

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Robert Aronen owns shares of none of the companies mentioned, and even after a few too many drinks, he has never worn a Detroit Lions jersey. Please feel free to share your comments with him at robertaronen@yahoo.com. Chalmette Refining is a joint venture between ExxonMobil and Venezuela's CITGO Petroleum. Motiva is a joint venture between Royal Dutch Shell (NYSE: RD  ) and Saudi Arabia's government-controlled Saudi Aramco.


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