National Gas Prices
Smart Profits Report Issue #526
Tuesday, May 27, 2008
by Martin Denholm, Managing Editor
I hope you enjoyed the Memorial Day weekend - and that your wallet still has a pulse if you did any traveling.
I managed to pack in four barbecues (or “cookouts” to put it in American lingo) over the weekend - all pretty close to home - so not too much damage done. And with soaring gasoline and food prices contributing to a projected 3.6% rise in consumer prices this year, it might be the best way to go.
Gas prices obviously remain front-and-center of the news, so let’s check in and see how it’s affecting consumers on both sides of the Atlantic, plus an industry that is arguably getting hammered even harder…
National Average Gas Price
Following a daily march higher over the past three weeks, the current national average gas price per gallon sits at an ugly $3.93. But with gas in 11 US states already over $4 a gallon, this number is now more for headlines than anything else. Bottom line: It’s expensive!
Little wonder that AAA projected a drop in Memorial Day travelers this year - the first decline since 2002. Many have also scaled back their plans, due to rising gas prices. And MasterCard reported a 7% drop in gas sales in the week leading up to the holiday.
But it wasn’t just Americans feeling the pressure at the pump this weekend…
Truck Jam
Like in the US, Monday was also a holiday in Britain, with the long weekend giving Brits a similar chance to hit the road for a short break.
Trouble is, UK gas prices are 17% higher than this time last year, with diesel prices almost 30% higher. The national average is currently $1.14 a liter and $1.26 a liter respectively. In US terms, that’s about $10.16 and $11.23 per gallon.
You can see why 16% of respondents to an Automobile Association survey said they plan to use their cars less.
What bothers many Brits, though, is that about 60% of fuel costs go into the government’s coffers in taxes. And today, the nation’s truckers took their protest to the streets.
In a mass demonstration against high prices and the government’s planned 2 pence per liter fuel tax rise (set to come into effect in October, having been postponed from April), hundreds of truckers set off from various parts around the UK and conducted a “go-slow” along the motorways.
One convoy ended at London, where the truckers handed a petition to the government at Downing Street. The other convoy, starting from further afield, handed its petition to the Welsh Assembly in Cardiff because (ironically), the trip to London would have cost too much.
The underlying problem that the trucking industry faces today is certainly not exclusive to Britain, though. High fuel prices are hammering both British and American truckers. So could America see a similar backlash?
America’s Big Rigs Have Big Problems
Actually, it already has. You may remember some truckers driving their rigs to the Capitol in Washington, D.C. in early April to protest against high fuel prices and imploring Congress to provide some relief measures.
You can see why. While diesel prices are up 30% in Britain over the past year, the price has blasted 80% higher in the US - from $2.50 a gallon this time last year to $4.50 today, according to the New York Times.
When it costs $1,125 to fill up a 250-gallon fuel tank, that clearly crushes any kind of profit margin that trucking companies hope to generate.
In fact, the American Trucking Association says times are so tough today that during the first quarter, 935 companies with fleets of five trucks or more went out of business. That’s up an astonishing 143% from the 385 in Q1 2007 - and is the worst quarterly “bust rate” since 2001.
In total, 45,000 trucking vehicles have permanently pulled off America’s highways since early 2007, according to America’s Commercial Transportation Research.
The domino effect of this is far-reaching. Reduced profits can erode employee wages, decrease supplies of goods, and create more potential for failing companies. In turn, that can cause bankruptcy and dents GDP growth.
So is there a way to play these developments?
Hit The Road (The Railroad, That Is)
In a desperate attempt to offset some of the costs, some trucking firms are turning to rail companies.
While trucks can only haul so much and are directly impacted by rising gasoline costs, rail companies can absorb soaring oil prices more easily, as they can haul more goods. A few of the biggest names in this area include:
Burlington Northern Sante Fe (NYSE: BNI) - a firm that Warren Buffett has invested heavily in… Union Pacific Corp (NYSE: UNP)… and CSX Corp (NYSE: CSX).
All three are also members of the Dow Jones Transportation Average (^DJT), which is a remarkable story itself…
Transports Bust The Trend
Remarkably, despite the march in oil prices to over $130 a barrel, that hasn’t stopped the Dow Transports from surging, too.
This is a major reversal in the historical trend. Oil prices and the Dow Transports usually move in opposite directions - and you’d think that with fuel being the biggest expense for Transportation Index companies and high oil prices pressuring so many areas of the transportation sector, the index that represents these firms would also be under severe pressure.
Not so. The DJT is actually up 15% in 2008, and as my colleague Jim Stanton reported in his bi-weekly “Sector Watch” column last Monday (May 19), the index raced to an all-time high of 5,550.17 on the same day. Jim applied some technical analysis to the index - and how to play the next move profitably through the index’s ETF - so take a look.
With the index made up of airlines like American (NYSE: AMR), Continental (NYSE: CAL), JetBlue (Nasdaq: JBLU) and Southwest (NYSE: LUV), plus shipping companies FedEx (NYSE: FDX) and UPS (NYSE: UPS) - all of which are buckling under the weight of high oil and gas prices - economists are now hotly debating whether it’s throwing the market a curveball.
Traditionally seen as a sign of US economic strength and turnarounds, the fact that the index is soaring while consumers and the economy are struggling is a source of confusion.
Some speculate that because airlines hold less influence in the price-weighted Dow Transports index these days, the other firms’ stronger performances are offsetting the losses from the airline industry. However, some also agree that the index needs to be rebalanced to boost diversity and better reflect the economy.
Yes, consumers are wilting under inflationary pressures as we head into summer. And yes, the trucking companies are some of the hardest hit firms.
But against the odds, the Dow Transportation Index is one of the market’s best performers, with some of the companies within it still going strong. Choose wisely and you could grab profits from a sector that many investors wouldn’t even consider at the moment.
Best regards,
Martin Denholm
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