Car Sales Point To Higher Oil Prices Ahead

Includes: F, GM, HES, MPC, SUN, VLO
by: Dana Blankenhorn

There is a common misunderstanding about the current recession, revealed in the latest “Big Three” auto sales. If you have a college education, if you have started a career or are midway in it, chances are you're doing OK. Unemployment among those with even a four-year degree is about 5.4%. Among those with more education it's even lower.

High unemployment is concentrated among baby boomers forced into early retirement by downsizing, among young workers with little experience, and among those without much education. It's a Democratic recession. Republicans are generally doing OK.

Once you understand this, the September Big Three sales make sense. GM (GM) sales rose 20%, Chrysler sales were up 27%.

Ford (F) sales were up “just” 9% but look where the gains were concentrated. SUVs, big trucks. The headline nails it.

What we're seeing is the stimulus of lower oil prices. Crude prices have dropped below $80. Gas prices dropped 21 cents per gallon last month and are headed down.

All this has encouraged suburbanites with aging gas guzzlers to get new gas guzzlers. The newer models do guzzle a bit less gas than the old ones, but they still guzzle it. The Ford Escape averages 23 miles per gallon and the hybrid model 34. That's twice or three times the mileage of a 2005 Ford Excursion but lower fuel costs will only pay part of the van's $25,000 cost.

What this says is demand for gasoline will fall slowly, not rapidly. I'm seeing it on my weekly bike rides. Big trucks that were hidden in driveways at $5/gallon are suddenly blasting past me regularly at $3.50/gallon. Barring another recession, expect those trends to continue.

That's good news for refiners like Sunoco (SUN), Hess (HES), Marathon (MPC) and Valero (VLO). They may be dinosaurs, but they can still make investors some serious money. Big new cars may sip less gas than big, old cars, but they still drink it up, and will for many years to come.

Disclosure: I am long F.