$60 a Barrel? Sell Big Oil!
By
Rich Smith
October 19, 2004
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Yesterday, we looked at the auto majors' plans to rapidly ramp up their offerings of hybrid gas-electric vehicles over the next three years. These plans have a couple of underpinnings. First and foremost, the guys over in Detroit smell profits -- not diesel fumes -- in the news of how popular hybrids such as Honda's (NYSE: HMC) Civic and Toyota's (NYSE: TM) Prius have become. And it's whetting their appetite for a piece of the hybrid pie.
But a second component to the story is one we're all seeing in the news, and at the pumps, every day -- oil prices topped $50 days ago and, despite the odd weak day, seem headed nowhere but up. That's great news for investors in Big Oil's brand names -- Exxon Mobil (NYSE: XOM), ChevronTexaco (NYSE: CVX), and ConocoPhillips (NYSE: COP) -- but for how long?
Think about it, people. The higher the price for any product, the lower the demand. Some products -- such as gasoline -- have pretty inelastic demand curves, granted. But ultimately, if you raise the price of any product high enough, people will begin to cut back on their consumption. And vicariously, that's exactly what Detroit (and its Japanese competitors) are doing for American oil consumers. By making fuel-efficient hybrid vehicles a viable option for car buyers, "Big Auto" has started America along a trend curve toward reducing our demand for Big Oil's gasoline.
Investors should take note of the trend. Over time, sales of hybrid vehicles will rise; consequently, sales of gasoline will stagnate or fall. How big of a trend will this be, and how much could it affect Big Oil? Big, and a lot. Let's look at some numbers:
A recent study done by consulting firm Booz Allen predicts that within five years, 20% of the cars on America's roads could be hybrids; within a decade, the percentage could reach 80%. Two popular hybrids now on the market that have nonhybrid analogs -- the Ford (NYSE: F) Escape and Honda Civic -- get as much as 50% better gas mileage than their nonhybrid counterparts. America currently accounts for 40% of worldwide gasoline sales. Multiply those numbers -- 20% x 50% x 40% -- and worldwide gasoline consumption could slow by 4% over the next five years and by 16% over the next decade. Sure, absolute consumption will rise to fight this trend as new car buyers are born and put more cars on the road. But the more time goes by, the greater the chance that those new cars will be hybrids themselves.
Read all about the developing war for hybrid vehicle dominion in these electrifying stories:
Fool contributor
Rich Smith
owns no shares in any company mentioned in this article.
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