When will the bull market in the oil patch end? A few weeks ago, I was lamenting that the end was upon us. This week, I return emboldened as a full-on energy bull because of my friends the American consumers.
Can't get enough
We all know the law of supply and demand, right? When prices increase, demand is supposed to fall. This doesn't work with gasoline, due to what economists call inelastic demand. Gas prices have tripled in the past five years. Only three years ago, the average gas price was $1.50 a gallon. One would think there should be a reduction in demand.
Instead, gasoline demand is at record levels. According to the Energy Information Administration, gasoline demand for the week ending June 23 was the highest ever recorded in the month of June. Furthermore, AAA predicts car travel for the 4th of July weekend will increase by 1.3% compared to last year. While this may be the slowest growth in driving for the 4th of July since 2000, it is definitely not a reduction in fuel demand.
When will it end?
I've said several times that gas prices won't go down, and not because of price fixing in the market. Inelastic demand is evident from current consumption figures. Basically, most people are not going to buy a new car just because gas prices increase. Even if they do, only a fraction will opt for greater fuel efficiency over size, function, power, or perceived image. In general, the population will continue to live in their current houses, work at the same jobs, and drive the same number of miles.
On the supply side, it takes a long time to develop oil fields, build refining capacity, build new pipelines and tankers, and increase supplies of finished product. Many investments are underway, but these projects are huge and will take three or four years before they are complete. Until these new projects are completed, even small increases in demand put more upward pressure on prices.
Conclusions
All of this leads me back to my original conviction that the oil patch is a fine place for my investments for the foreseeable future. The recent sell-off has created more attractive prices for deepwater drilling companies like Transocean (NYSE:RIG) and Global Santa Fe (NYSE:GSF). Some investors may be put off by the $400 million insult of Lee Raymond's retirement package, but ExxonMobil (NYSE:XOM) continues to sport an attractive price to earnings ratio and solid balance sheet, and pays a substantial dividend. As an alternative, ConocoPhillips (NYSE:COP) shares many of these traits without the insult of the retirement package. For investors who want to get in on the construction boom, CB&I (NYSE:CBI), Jacobs Engineering (NYSE:JEC), and KBR, a division of Halliburton (NYSE:HAL), have all announced plenty of new contracts.
Someday, I am sure, the boom will end, and the past two months have shown how volatile the market can be. However, with Americans driving in full force, the global economy growing in unison, supplies tight, and projects for new production four years into the future, I don't think the end is upon us just yet.
Related Foolishness:
- ExxonMobil's $400 Million Insult
- Is the Oil Boom Over?
- Proof of Price Fixing at the Pump
- Gas Prices Won't Go Down
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Robert Aronen owns shares of Transocean but of no other company mentioned in this article. He is not driving this weekend. The Fool has a disclosure policy.
