Gasoline Has A Dirty Secret And It’s Making Investors Rich
I just filled my truck with gas. I paid almost $2.60 a gallon, which seems expensive to me.
It’s hard to believe that prices this summer were the highest they’ve been since 2014. We’ve had almost four years of low gas prices…or what feels like low.
However, based on the price of oil, we are paying more for gasoline now, in relative terms, than in 2008.
A little more. That makes me think that there is an investment opportunity.
Let me teach you…
Something strange is happening with gasoline
The price of oil represents only 45% of the price of gasoline. The rest are taxes (21%), refining costs (18%) and distribution (16%).
However, something strange is happening with the price of gasoline. We can see it from a simple comparison: how many gallons of gasoline can we buy with a barrel of oil.
In theory, that ratio shouldn’t change much. However, something is not right with the price of gasoline. As oil prices fell from 2008 to the present, the price of gasoline became more expensive relative to the price of oil.
Gasoline has become more expensive relative to the price of oil.
Oil refineries are a good option today
Before 2017, the price of oil accounted for 62% of gasoline costs. But in 2009, it took 50 gallons of gasoline to pay for a single barrel of oil. Considering there are only 42 gallons in a barrel of oil, something was wrong.
When oil prices soar, refineries have a hard time producing gasoline at a profit. That’s because as gasoline prices rise, consumers conserve.
In 2009, the US saw the fewest miles driven since 2003. That forces refiners to keep the cost of gasoline low, even as they pay high oil prices.
However, as oil prices fell in 2016, refiners regained ground by extorting money from consumers. They charged more for gasoline… lowering the ratio and raising the profits.
giant oil refiner Valero Energy Corp. saw its revenue fall from $113 billion in 2008 to $63 billion in 2009. From 2013 to 2015, as prices fell, Valero’s profit grew from $5.7 billion to $8.2 billion . That was a 44% increase in profit, even as oil prices collapsed from $100 to $30 a barrel.
Today, we are seeing something similar happen. As oil prices contract lower from a recent high of $66 to $60 and below, we can expect gasoline prices to decline more slowly. That means refiners will probably do well this year.
And the sector should continue to do well. And the recent pullback makes the refining complex look attractive today.
If you want to put money to work in oil without direct exposure to the oil price, that’s a good option today.
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