Dobson spoke with UBS Trending host Anthony Pastore on a segment which first aired on 17 May, 2022.
Click here to watch the full episode.
Some highlights:
Let’s start with the question on everybody’s mind: Are gas prices going to go higher?
The summer driving season is upon us, so the punchline is yes, gas prices are likely to go higher. Regular gasoline is currently averaging about USD 4.40 a gallon and diesel around USD 5.60 a gallon. So why are prices so high? Oil prices are high, and oil is a major input into gasoline. Also, refining capacity is low, with the war in Ukraine having taken refined product supply out of the global markets. Lastly, the summer driving season means demand is rising.
Historically, though, when prices go higher, doesn’t demand typically fall?
Historically when you get to the USD 4.00 level for regular gasoline, people drive less, but we aren’t seeing that dynamic now. This is related to pent up demand from people not going out and traveling much over the last two years due to the pandemic. We can’t say this is the case universally, because sadly gasoline cost is regressive – meaning high prices are most harmful for those who can afford it least. That means some people will drive less out of necessity, but among those with the spending power, demand is likely to remain strong, which could drive prices higher.
What is the relationship between the price of oil and what we pay at the pump?
About 60% of the price of gasoline is dependent on oil, another 20% goes to the refining of that oil, 12% or so in taxes and then another 12% in retail marketing and distribution. People might immediately say why don’t the gas retailers give up their profit margin, but that goes towards paying for employees and gas stations. I’d say roughly the average retail profit on a gallon of gasoline is 10 cents, maybe 15 cents, so even with no profit, there’s not a lot of margin to give.
The Biden administration just released some petroleum reserves. Does this help?
Yes, but they are not releasing gasoline and diesel, they are releasing oil. To get gas prices down, we need another barrel of oil plus refining capacity to refine that oil. You need both. The administration is releasing 180 million barrels over six months, ending in October, which is about a million barrels a day. To put that in perspective, US demand is slightly higher than 20 million barrels a day – so the 180 millions barrels release is about 9 days of demand. However, they will have to refill the petroleum reserves at some point. So what they’ve done is moved some of the demand risk into 2023 rather than 2022. What this tells me is that oil prices will likely remain high, and gas prices will likely remain high.
The Chief Investment Office remains overweight on energy stocks. Click here to watch the full video for additional commentary. It first aired on 17 May, 2022.
For CIO’s latest equities preference list for the energy sector, ask your financial advisor for a copy of US Equities Energy: Equity preferences, published 5 May, 2022.
