Until Consumer Habits Change, Energy Stocks Should Continue to Shine

It’s amazing that gas prices hit $4 per gallon in Chicago and San Francisco even before the summer driving season officially started. There are several reasons why we are paying so much to fill up our gas tanks but the one that I think is most important is not talked about as much as it should be.

As you can see, SUV sales as a percentage of vehicle sales has more than doubled over a ten-year period. Since SUVs are far less fuel efficient than cars, they account for a large portion of the increased oil demand in the United States.

There is no doubt that the Iraq war is contributing to high energy prices (oil production there is below pre-war levels), as is rising demand from emerging economies like China and India. However, the habits of the U.S. consumer is the largest contributor to our country’s sky-high energy use, and as a result, record-high prices. After all, what we do in this country has a profound effect on the energy market. Despite only representing 5% of the world population, we consume 25% of its oil.

The way I see it, the culprit is the rise of the sport utility vehicle in the United States. Many people who drive SUVs are quick to complain about paying $60 to $70 or more to fill up their tanks each week and accuse the oil companies of gauging prices (which is a ridiculous, baseless claim), but they are a large part of the reason gas prices are north of $3 per gallon nationally as I write this.

If you don’t believe that America’s love affair with SUVs is affecting gas prices, one glance at the numbers might change your mind. The statistics below are from the Environmental Protection Agency (EPA), an organization that tracks U.S. energy use very precisely. I don’t think it is just a coincidence that there has been a direct correlation between SUV sales, petroleum use, and gas prices. After all, the oil markets are based on supply and demand. With worldwide supply flattening out, demand is crucial in determining price levels.

I am not a fan of heavy government involvement as far as dictating human behavior is concerned, but I would not be opposed to increasing incentives for people to ditch their SUV, as well as higher CAFE standards for fuel efficiency. If we could reverse the trend of SUV prominence, oil demand is this country would drop, and prices would follow suit.

For those who need to drive SUVs, that’s fine, but they need to understand that higher gas prices might be a cost of driving a larger vehicle, and that blaming the oil companies for high prices is ignoring how the global oil market works. The biggest improvement could come from those who own SUVs without a real need for it.

Until driving habits in the U.S. change, gas prices will remain high and oil companies will continue to reap the benefits on their income statements. As long as the trend shown in the graphic above remains intact, investors should continue to hold a healthy dose of energy stocks in their portfolios.

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7 Thoughts on “Until Consumer Habits Change, Energy Stocks Should Continue to Shine

  1. Anonymous on May 21, 2007 at 1:18 PM said:

    Wait a minute….did the population grow dramatically from 1995 to 2005? You seem to blame SUVs for the world ills when clearly it’s not really the case.

    You have many factors for gas price increases:

    1. Larger population consuming more cars (not just in the US but all around the world).

    2. Refining production & capacity for gasoline is at a 20 year low; not one single mention here about that. Constrict supply and price will go up. simple economics.

    3. Mass production of cheaper cars from places like Korea drove down prices of small cars which added MORE vehicles to the road which lead to increase in gasoline demand and consumption.

    4. Various interruptions in supply of oil from Nigeria, Venezuela, Iraq, and other places is also a factor.

    I could go on but its better to blame SUVs. My SUV can carry 7 people comfortably along with some cargo. If I didn’t have my SUV I’d have to use TWO cars to go on vacation. Does that make sense to you?

    How do I know this to be so? Many family members always ask to borrow my big gas guzzling SUV for long trips because they don’t want to be sitting in a matchbox for 6 hours driving somewhere with no spare room even though they might save a couple of bucks on gas.

  2. Chad Brand on May 21, 2007 at 1:45 PM said:

    I began the post by agreeing that there are several reasons gas prices have increased. I am not saying SUVs are the sole explanatory variable, or that there are not good reasons to have an SUV (large families, etc).

    The population is growing 1% per year, so that is having some effect, but not very much.

    Supply is not really an issue. U.S. production has decreased, but we just make up for that by importing more oil. We have not had a shortage of gas in the U.S. in the time period discussed.

    In my opinion, it’s a demand story. Supply isn’t growing fast, but that would not be an issue if demand was not growing faster than supply.

    Vehicles account for 70% of oil use in the United States. When the market share of a far less fuel efficient vehicle doubles over 10 years, and vehicles account for the majority of oil demand, I think the case is compelling that it is the biggest contributing factor within our borders.

  3. Anonymous on May 21, 2007 at 2:20 PM said:

    Chad,
    I agree with you that SUVs have a lot to do with high gas prices. One more factor is the growth of suburbia, with big part of the population driving tens of miles each way to work every day. People are living farther away from the big business centers. Also, the underdeveloped rail network (especially compared to Japan and Western Europe) versus the well developed highway system. Too many goods that could be shipped by rail are being shipped by trucks. Not an energy efficient solution, and the government has a lot to blame.

  4. Chad Brand on May 21, 2007 at 2:37 PM said:

    Good points.

  5. Anonymous on July 18, 2007 at 5:10 PM said:

    While I agree with the fact that SUV users shouldn’t really complain about the high gas prices.

    I expected much better in your reasoning. Seriously. The reasoning that you have used could also explain a storm in Nebraska because a butterfly flapped its weeks in god knows where.

  6. Chad Brand on July 18, 2007 at 5:23 PM said:

    I think if you look at the causes of increased gas demand in the U.S., you will have a hard time finding another culprit that matches the effect of far less efficient SUV market share doubling within a decade. Other factors contribute too, but I don’t think they compare in magnitude. If you have any numbers to the contrary, please share.

  7. jackpayne on July 28, 2007 at 2:21 PM said:

    High gas prices should not be a mystery. With production so severely shunted in the U.S., with our insanely high reserves, it is no wonder. When you can’t drill in 85% of the continental shelf. And, you are cut off from Anwar’s vast reserves (including the never talked about, immense natural gas reserves), I can see gas-at-the pump prices rising to $5.

    –Jack Payne
    http://www.legalthriller.blogspot.com

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