When I saw a story that AAA expects 37.6 million Americans to be traveling this Memorial Day weekend - which kicks off the summer driving season - I did some easy math to figure out why oil company investors like this news so much. The reason is that 38 million equals 798 million. AAA figures that these 38 million road warriors will be traveling at least 50 miles this weekend. I guess these “extra” drivers are in addition to all the usual gas consumption done during a holiday weekend.
For this exercise, I assume that those 38 million will actually drive 100 miles at a minimum when taking into account getting to and from their holiday hotspot and subsequent driving while there. Figuring that the average American car gets about 15 miles to the gallon and gasoline is about $3 per gallon nationally; this means that each of the 38 million will spend $21 just on gas. This equates to additional holiday sales of $798 Million for our nation’s oil companies (100 miles divided by 15 mpg = @ 7 gallons of gas at 3 bucks per gallon times 38,000,000). $798,000,000. ExxonMobil, the world’s largest integrated oil company; which has about 20% market share in the U.S. will take in about $160 million in additional fuel sales. Not bad at all for a weekend’s work.
Of course this calculation is rudimentary at best, but these things are fun to think about on a holiday and talk about at bar-b-ques. More importantly, however, is that this highlights some very serious imbalances in our economy. These imbalances will ultimately force many consumers to cut back in other areas of normal spending due to sustained higher fuel prices especially this weekend and throughout the summer. Throw in one or two hurricanes hitting the coast later this summer and gas prices couple be north of $4 in an eye blink.
It is these potential price shocks and consumer cutbacks that have had Wall Street spooked for the last two weeks. The sell off we have seen is due in part to the huge run all asset classes have enjoyed the past few months; but was triggered by the realization – finally – that our economy is actually quite weak. I believe there is more consolidation ahead for the markets given the underlying weakness in the global economy, sustained high commodity prices, weakening dollar, and high budget deficit. Add in some unwarranted optimistically high multiples on stocks and I think we are in for a tough boat ride this summer and fall. Stay long energy.