Thursday, May 10, 2012

Investing 101 ... Gas Prices and Wal-Mart Shoppers

Gasoline prices usually peak around Memorial Day weekend and then stay high through the summer vacation driving season. This year they're dropping instead.

As with most things, that represents both good and bad news.The good news is that consumers will be spending less to fill up our tanks and will have more money available to spend on other things. The bad news is that gas prices are declining in large part due to slow economies throughout the world, including ours, as countries struggle to deal with their debts and deficits, and still achieve sustainable and satisfactory economic growth.

But lower gas prices in the U.S. will definitely help to get lots of things moving in the right direction. As Gas Prices Fall, a Sigh of Relief says this in part:

"Gasoline prices fell for the fifth consecutive week, extending a sharp decline that has eased fears that prices would soon top $4 a gallon at the pump. . . .

Many of the forces that drove gasoline up are reversing, and that is helping bring prices back down, though they still remain near record highs. Tensions over Iran's nuclear program have eased, while softening economies in the U.S. and Europe have curbed demand. At the same time, some refineries pegged for closure are coming back online, and bottlenecks in the supply of crude oil are becoming unclogged.

The changes have led analysts to temper their price predictions for the summer driving season. A few months ago, some were saying pump prices could shoot above $4 a gallon and even reach $5 by the summer, but now they say that is highly unlikely. . . .

Gas prices touch nearly every aspect of the economy. A rise hurts both consumers' spending and their confidence—gas-station signs provide drivers a near-constant reminder of pricier fill-ups to come. Restaurants, retail stores and hotels suffer as consumers cut back. And far from the consumer economy, higher shipping and material costs erode corporate profit margins and, over the long term, drive up inflation.

Falling prices, on the other hand, provide a form of stimulus, as money that otherwise would have gone into drivers' tanks instead flows to more-productive uses. The EIA estimates that a 10-cent drop in pump prices can add roughly 0.1% to disposable household income, said Kay Smith, a senior economist at EIA.

Consumers have spare cash for other purposes, said Ms. Smith. "Some of it will go into savings, but most of it will probably go into the consumption of other goods" and services, she said. . . .

Analysts warn that the market remains vulnerable to sudden disruptions, including any conflict in the Middle East that could threaten the supply of crude oil, which is refined into gasoline. But barring major upheaval, they say, prices will probably stay relatively flat, and could even head lower, over the next few months. . . .

"We feel quite confident saying that prices have peaked for the first half of 2012," absent a fresh crisis, said Avery Ash, manager of regulatory affairs at AAA, the motorists' organization. . . .

In terms of supply, domestic crude oil is plentiful. Inventories at a key storage hub in Cushing, Okla., hit a high last week, according to U.S. data, and U.S. oil prices fell 6% last week alone, dropping below $100 for the first time since February. . . .

U.S. gasoline consumption is down from a 2007 peak, reducing upward pressure on prices. New, more fuel-efficient cars are an important factor, as Americans replace an aging passenger fleet."

Summing Up

Lower gas prices are a good thing for retailers, restaurants and others that cater to consumers. Thus, blue chip companies like Wal-Mart (dividend yield of 2.7%) and McDonald's (dividend yield of 3%) will be beneficiaries of lower prices at the pump, as their customers will have more money to spend and it will cost them less to get to the store or restaurant.

More broadly, costs to companies will be lower as well if energy prices continue to decline. That should aid both company profits and consumer prices.

In addition, there's a currency benefit which will help keep U.S. energy costs low for the foreseeable future. In that regard, the U.S. dollar will be a beneficiary of the turmoil in Europe as our economy continues to grow while Europe tries to fend off recession.

Since oil is priced in dollars, that will make our fuel prices come down. Of course, this all assumes no near term catastrophe in the Middle East which would cause oil prices to explode.

Hence, my bet is that we'll have more money to spend, and the costs of much of what we'll be buying will be decreasing at the same time.

In sum, lower energy prices represent another good thing for Americans which will further help our economy grow over time.

Thanks. Bob.