Skipping the Trip

Jim Brown
 
Printer Friendly Version

With gasoline prices very close to $4 per gallon the low priced retailers are struggling as the number of customer visits decline. Wal-Mart reported same store sales declined by -1.1% last month as store traffic slowed significantly.

Fuel prices are a clear cause of recessions. Fuel prices have risen sharply before nearly every recession since 1950. While we are not in a fuel recession yet in 2011 we are dangerously close.

Wal-Mart said this week that customer traffic was slowing because customers are driving less. They are consolidating trips to conserve fuel as prices hover near $4. According to Wal-Mart one in five Wal-Mart moms list gasoline as their biggest expense behind housing and car payments.

Wal-Mart, Lowes and Home Depot all reported slowing customer traffic over the last month. In theory they should be seeing increased traffic as weather improves and families and homeowners begin preparing for summer. Wal-Mart warned that sales trends in Q2 would pressure profits again.

Lowes also blamed their lower customer counts on gasoline prices. The company said customers were reducing trips to shop and ordering more online. Lowes reported a -3.3% decline in same store sales fore April. Home Depot reported a -0.6% decline in same store sales.

In the USA online sales in April jumped +19% compared to the same period in 2010 according to MasterCard. They also reported fewer trips to retail locations and the increase in online purchases.

The pressure from gasoline prices is impacting lower cost retailers that cater to blue collar workers more than those retailers that cater to high end consumers. In the table below you can see how the same store sales decline with the decline in core customer base.

Same Store Sales Table

Are we heading into a new recession thank to current fuel prices? I think it is too early to tell and prices are slowly easing. Average gasoline prices this week have declined to $3.926. That is not far enough from $4 to really change the demand levels. We need to see gasoline prices retreat to $3.50 to make a material difference and I don't see that on the horizon any time soon.

Crude prices have declined in the USA to $95 but rebounded back to the $100 level almost immediately. Unfortunately most U.S. refiners have to buy oil on the coasts and those prices are indexed to Brent or Louisiana Light Sweet crude and those prices are still in the $112 range today. Gasoline is not going much lower as long as refiners are paying over $110 for oil. We could see a decline to $3.80-$3.85 but that may not be enough to make a difference. As the summer driving season kicks into high gear we should see upward pressure on prices not downward.

What we are seeing in the way of fewer trips by consumers is normally referred to in the press as demand destruction that will lead to lower oil prices. Unfortunately they are incorrect. When a mom makes a conscious decision to make one shopping trip a week and hit 3-4 stores on the same trip rather than make several trips per week that is not demand destruction. She will use less gasoline but this is a temporary change in shopping habits. It is not a permanent situation. This is demand delay not demand destruction. When gasoline prices decline she will go back to her old habits because the fill-ups will be less painful. Also, as consumers grow accustomed to paying higher prices they will eventually return to making more trips. Demand was simply postponed.

If mom decides high gas prices are hear to stay and trades in her 15 mpg car for a 25 mpg car then her fuel consumption has changed permanently. That is demand destruction. Prices forced her to make a permanent change in her driving by using a more economical car. However, her longer time between fill-ups will ease her mind about making multiple trips and old driving habits will return. She won't use as much gasoline as before and the amount of gasoline saved is the amount of demand that was destroyed.

When consumers trade in their older cars for something as fuel thrifty as a Prius or something similar the amount of demand destruction is significant. However, far less than 1% of U.S. consumers will take that hybrid plunge.

The Bureau of Labor and Statistics claims 3.2 million students graduate from high school every year. Using that statistic we can get a clue as to how many new drivers we have every year. Since the majority of the country does not have a blanket of public transportation systems like you would find in New York we can assume that every year a large portion of those 3.2 million students will acquire a car and become new drivers. If we are generous and assume 25% of those students use public transportation that still leaves 2.4 million new drivers every year and that only accounts for the U.S. student driver growth.

The Dept of Homeland Security estimates there will be 1.2 million immigrants in 2011 that achieve permanent resident status. Another one million plus will enter on temporary permits and another 500,000 will enter the country illegally. If we just assume one million of that 2.7 million total will acquire a car I believe we would be underestimating the total.

To put all this in perspective our consumer moms may be making fewer trips to the store thanks to high gasoline prices and that may depress demand temporarily but longer term demand will always go up thanks to the growth in the population base. Will that small subset of new drivers I identified above of 3.4 million a year offset the delay in demand by fuel conscious moms? Maybe not today because there are a lot more moms cutting a trip a week out of their schedule. However, long term the answer is clear. Demand, even at higher fuel prices, will continue to grow.

Jim Brown

This newsletter is only one of the newsletters produced by OilSlick each day. The investment newsletter is also produced daily and contains the current play recommendations in the energy sector. Stocks, options and futures are featured. If you are not receiving the "Play Newsletter" please visit the subscribe link below to register.

Subscribe to Energy Picks Newsletter

See a list of our closed plays from 2010 here: Closed Positions

The OilSlick Newsletter is based on the expectations for global oil production of light sweet crude to peak and begin to decline in the 2012-2014 timeframe. I am calling this "Peak Sweet™" instead of Peak Oil. This is the point where global production of conventional light sweet crude supplies can no longer be supplemented by enough oil sands production, deepwater oil production, biofuels and natural gas liquids to offset the decline in existing fields. The roughly 6% annual decline of existing production due to depletion is larger than the rate of new discoveries and new production being added each year. The Peak Sweet™ countdown clock is ticking and time is growing short. Peak Oil will arrive shortly thereafter. Are you prepared?

Archives:200920102011201220132014201520162017