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InvestorGuide University > Subject: Government and Economics > Hurricane-onomics: Gasoline Tax

Economic Trends
Hurricane-onomics: Gasoline Tax
by Clark Kendall (Write for us!)
(Click on the links within the article to get definition of that word)

For the past thirty years U.S. consumers have enjoyed relatively modest gasoline and oil prices. The price of gasoline has been relatively stable between $1 and $2 per gallon. The latest bump up in gasoline prices, after hurricanes Katrina and Rita, to over $3 per gallon will have an effect similar to a consumption tax but with the potential to be more effective in affecting consumer behavior than any regulatory action the Federal Government could impose. A sustained rise in gas prices will redirect our country's resources toward the development of additional oil refineries; exploration for new oil fields; and technological innovation to more effectively extract oil deposits. The rise in gasoline prices has already started a step up in the production of hybrid cars, and more conscious use of oil and gas by the consumer.

The price premium will direct financial resources directly to the oil and gasoline industry. With gasoline at $2 per gallon, it is only so profitable or desirable to explore, drill, refine, and deliver oil-based products to consumers. When gasoline rises to $3 - $4 per gallon, it becomes 50% to 100% more profitable, and desirable, to invest in new ways to produce more oil. The fact is, there has not been a new oil refinery built in the United States in over 29 years. Gasoline at $1 to $2 per gallon did not warrant the expenditure of investment capital because the expected returns were not worth the expected costs and risks. Simply put, gasoline at $3 or $4 will increase the expected returns in this industry and also attract long under-allocated investment capital.

A gallon of gasoline at more than $3 has already begun to change consumer attitudes and consumption patterns. Hybrid cars have become considerably more desirable with the dollar rise in the price of gas. Ford Motor Company already announced that it is stepping up production of their hybrid fleet to meet the expected increase in consumer demands.

Home heating oil prices are expected to rise 35% from last year to above $2.50 per gallon. This will result in demand for more efficient heating systems; a push for cleaner, cheaper alternative energy sources such as nuclear power. Short term, this is a painful consumer tax; long term, this is a much needed process to redirect our resources to efficient use of our energy.

For all of 2005, Americans are expected to spend $1.08 trillion on the fuel and energy needed to run their cars, power their offices and heat their homes. That represents 8.7 percent of the nation's total annual Gross Domestic Product, the highest GDP percentage spent on energy in 20 years. Efficient use of financial capital will redirect resources to bring this cost down.

The Federal Reserve recently reported in its September 20, 2005 press release "...unfortunate developments have increased uncertainty about near-term economic performance, it is the committee's view that they do not pose a more persistent threat. Rather, monetary policy accommodation, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Higher energy and other costs have the potential to add to inflation pressures. However, core inflation has been relatively low in recent months and longer-term inflation expectations remain contained." In a nutshell, the Federal Reserve is telling us they do not foresee a long term economic impact resulting from the two most recent hurricanes.

For the past decade, the U.S. economy has grown at a historically high rate due largely to steady high growth in labor productivity. This increase in labor efficiency has primarily been in the information services, financial services, and in consumer consumption goods. Until recent price hikes in gas and oil, there has not been as great a financial incentive to find efficiencies in the energy sector.

Our investment philosophy is to look for quality companies growing revenues and earnings faster than the market. It is a legitimate question for readers to ask why Kendall Capital has not jumped on the energy sector bandwagon that has been leading the market for most of this year. We are not comfortable attempting to make long term investment decisions to buy stocks of companies where revenue is being driven solely by key commodity prices. It is our experience that this type of revenue growth is not sustainable. In this instance, the sector was not particularly attractive from a valuation standpoint before the recent run up in prices. We believe our clients are investors not traders and are comfortable with our fundamentally-based investment approach.