Wednesday, February 29, 2012

Winners and Losers From Higher Gasoline Prices

Losers first.
From Yahoo's Contrary Indicator blog:
Wal-Mart. Analysts largely miss the boat when they conclude that higher gas prices will eat into all retail spending. A hedge fund manager whose commute consists of a few miles round trip from his home in the back country of Greenwich, Connecticut, to the town's train station won't blow any less dough at Tiffany's or The Palm if gas goes to $5 per gallon, or even $10 per gallon. The millions of workers up and down the eastern seaboard who commute by train, bus, subway, boat or bike are similarly immune from spikes in oil. The Whole Foods on Houston Street in Manhattan won't sell any less wild salmon or precious cheeses due to higher gas prices. But if you're a retailer who caters to people with limited incomes who generally rely on cars for all their transport, and who must travel long distances to get to the store — well, that's another story. For this segment of the population, the cash for groceries and gas tends to come out of the same pool. An extra $10 per week spent at a Mobil station in Kansas is likely to result in $10 fewer spent at Wal-Mart.

Airlines (and their passengers). U.S. airlines have continued to struggle even as the economy expands, in part because fuel is a very large fixed cost that airlines are largely powerless to control. When fuel prices rise, airlines face the unenviable choice of passing the higher costs through immediately to their customers (thus alienating them further), or eating the costs, thus sapping their profits. Companies can protect themselves against spikes in the price of oil by hedging. But that costs money, and involves the use of derivatives. This great chart from Bloomberg on fuel hedging shows that, in the fourth quarter of 2011, American Airlines hedged only 52 percent of its consumption while JetBlue hedged 45 percent of its consumption.

The Kwik-E-Mart. Consumers often wind up expressing their rage over high gas prices at gas stations. But the convenience stores/gas stations that gobble up large chunks of our paychecks are also victims. When gas gets very expensive, people drive less and buy smaller amounts of gas. That's bad for business. And as the National Association of Convenience Stores (NACS) reminds us, more consumers tend to drive off without paying when gas nears $4 per gallon. Also, as NACS reports, the real money at gas stations lies not in the sale of low-margin toxic stuff you put in your gas tank, but in the sale of high-margin toxic stuff you put in your mouth: soda, slushies, nasty hot dogs. As NACS notes: "Motor fuels sales accounted for more than two-thirds of the convenience store industry's sales in 2010 (66.9 percent). However, because of low margins, motor fuels sales contributed less than one-third of total store gross margins dollars (26.4 percent)." When you have to pay $60 instead of $50 to fill up, you're less inclined to shell out for Doritos.

Refiners. High oil prices are great for the upstream components of the business (i.e. crude extraction), but aren't so great for the downstream components, like refining, distribution and retail. Oil refiners perform best when the price they pay for crude oil is low and the demand for finished product is high. The difference between the two is known as the cracking spread. But when crude prices rise sharply, it means refiners pay more for their key input as local demand tapers off. And that tends to compress cracking spreads. (Here's a Bloomberg chart of cracking spreads.) As this one-year chart of the big refiner Valero shows, rising crude prices don't necessarily produce a gusher of profits for refiners.

Daniel Gross is economics editor at Yahoo! Finance....MORE
HT: Abnormal Returns