Jubak's Journal
Recent articles:
• When will oil run out of gas?, 7/8/2005
• 5 buy-on-the-dip opportunities, 7/6/2005
• 5 stocks playing catch-up with oil, 6/30/2005
More...
| | Jubak's Journal
When will oil run out of gas?
(Page 2) of 2
 Previous
Why steep prices fail to dent demand
What's driving this seemingly perverse response to higher oil and gasoline prices? Take a look at these three reasons that explain, in my opinion, why higher prices haven't yet depressed demand.
1. The rise in energy prices follows a decade of depressed prices. In that period, the price of everything from a movie ticket to college tuition rose faster than energy prices. On an inflation-adjusted basis, oil and gas prices aren't that high. They're still playing catch-up.
2. Behavior changes more slowly than you'd think. Gas costs 13 cents a gallon more? Well, you've still got to drive to work, run the kids to their soccer games and do the weekly shopping run to Wal-Mart (WMT, news, msgs). What's the alternative? Public transportation? Ever take a bus in Los Angeles or try to get from Silver Spring, Md., to Falls Church, Va., on Washington's Metro? Buy a new car that gets better mileage? Tempting, but forking $20,000 to $40,000 to beat a 13-cents-a-gallon increase or even negotiating a new auto lease seems extreme. Maybe gas prices will fall again.
3. Much of the growth in demand is coming from consumers in China, India and other developing economies who are sheltered from the true world price of oil by domestic subsidies. Indonesia, which has moved from being a net oil exporter to an oil importer in the last year, will subsidize its oil refiners to the tune of about $4.3 billion this year. In India, the state-owned oil companies have simply swallowed much of the recent price increase in gasoline, propane and kerosene. Total losses from that freeze are estimated at $2.7 billion in the 12 months that ended in March. Gasoline in China sells for below global prices, and the country has kept diesel fuel prices fixed out of a fear of hurting farmers.
Some of these demand-side factors have started to change in recent months. Fuel subsidies in Indonesia had become so expensive that the government raised gasoline and diesel prices by 30% in April, which will cut the size of the government subsidy to $4.3 billion in 2005 from $6.4 billion in 2004. China is introducing its first fuel-efficiency standards for cars in an effort to discourage SUV purchases. In the U.S., consumers faced with higher prices at the pump have scaled back purchases of SUVs.
Waiting for a meaningful reduction
But these are just the beginning of a demand-side response to higher fuel prices, and it'll take more time and higher prices before we see a meaningful reduction in the oil and gas demand.
How much higher and how long? The Bank for International Settlements has projected that, thanks to the increased energy efficiency of some of the world's economies and the shift from an energy-intensive manufacturing economy in the U.S. to a service-oriented economy, it might take $75-a-barrel oil to put a serious nick in global demand.
Cambridge Energy Associates, which believes that higher oil production will push prices back toward $40 a barrel, pegs the increase in production and falling prices for 2007-2008.
Both projections argue for higher-than-current oil prices through 2005 and certainly well into 2006.
Mind you, these are relatively short-term trends I'm talking about here. A drop to $40, even if it occurs, still leaves oil prices well above the $10- to $20-a-barrel lows before this run-up began. In other words, $40 would become the new floor for the next multi-year move higher.
How much higher and when depends on whether you think global oil production has peaked or when it will peak. On this one, I think the oil bears are the most useful guide. Cambridge Energy Associates basically pooh-poohs the belief that oil production has peaked and thinks those who put the peak in 2008 are just slightly less misguided.
But they still believe we're within shouting distance of a production peak. They put it in 2020.
New developments on past columns
Second-quarter 2005 performance for Jubaks Picks
Its time for the end-of-quarter and longer-term performance numbers on Jubaks Picks. The portfolio finished the second quarter of 2005 solidly ahead of all the indexes with a return of 6% for the period. For the quarter the Dow Jones Industrial Average ($INDU) lost 2%, the Standard & Poor's 500 ($INX) returned 1% and the Nasdaq Composite ($COMPX) returned 3%. The 6% return on Jubak's Picks for the June quarter of 2005 compares to a 4% return for the second quarter of 2004. For the trailing 12 months, Jubak's Picks returned 30.4%. That was ahead of the -2%, 4% and 0% returns for the Dow, S&P and NASDAQ indexes, respectively. The portfolio's year-to-date return was 11.8%
But returns for the quarter would have been better if I hadn't gotten the macroeconomic picture, especially on interest rates, so wrong. I sold my real estate stocks, The St. Joe Co. (JOE, news, msgs) and Tejon Ranch (TRC, news, msgs), way too early: 13.2% and 8.1% too early, respectively. I also made a big mistake selling Wolverine World Wide (WWW, news, msgs) on my worries about a slowdown in Europe. (The shares are up 16% since I sold them.) And I got caught twice by MBNA (KRB, news, msgs), once when I bought it and the stock plunged and a second time when I sold it and the stock soared on a buyout offer from Bank of America (BAC, news, msgs). My best call for the quarter was to load up on energy and then load up some more when the sector dipped. And, though you can't tell it, the portfolio benefited from a rally in the gold sector that took my three gold stocks, Newmont Mining (NEM, news, msgs), Placer Dome (PDG, news, msgs), and Goldcorp (GG, news, msgs) from deep underwater to somewhat less damp surroundings.
Heres how I did against the major indexes:
| Jubaks Picks vs. major averages | | Index | Second quarter 2005 | Trailing 12-month | | Jubak's Picks | 6.0% | 30.4% | | Nasdaq Composite | 3% | 0% | | Standard & Poor's 500 | 1% | 4% | | Dow Jones Industrial Average | -2% | -2% |
|
Here are longer-term performance numbers for three years, five years (a period that this quarter begins just three months after the peak of the bull market in 2000 and includes much of the bear-market collapse from that peak) and since the inception of the portfolio:
| Jubak's Picks vs. the indexes -- the long-run picture | | Index | 3-year return* | 5-year return** | From inception*** | | Jubak's Picks | +74.1% | -6.0% | +179.3% | | Nasdaq Composite | +46% | -48% | +55% | | Standard & Poor's 500 | +23% | -18% | +45% | | Dow Jones Industrial Average | +13% | -1% | +44% |
|
*Close on June 30, 2002, through close on June 30, 2005.
**June 30, 2000 through June 30, 2005.
***May 7, 1997, through June 30, 2005. All returns for Jubaks Picks deduct costs of commissions.
As is my practice, I will update these performance numbers at the end of the next quarter in September 2005.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Canadian Natural Resource, Goldcorp, Newmont Mining, and Placer Dome Gold. He does not own short positions in any stock mentioned in this column.
|
