When Gas Pump Prices Rise, Do Oil Stocks Rise?

By Erin McBride - January 8, 2012 | Tickers: BP, CVX, COP, XOM, RDS-A | 0 Comments

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The price of gas went up this week, and it begs the question- do gas company stocks rise when gas prices rise?

To better understand oil prices and the corresponding stocks, there are a few things to consider when you hear, see, and feel high gasoline prices and what to do about them. They won't make filling your gas tank any cheaper, but at least you'll feel like you are not losing more money than necessary if you know how to play the game. Rather than do deep research on all of the major oil producers, let's focus on the largest of the big five oil companies- ExxonMobil (NYSE: XOM).

First, a lesson in understanding oil prices

ExxonMobil’s earnings come from operations in more than 100 countries around the world. The part of the business that refines and sells gasoline and diesel in the United States represents less than 3 cents on the dollar of total earnings. For every gallon of gasoline, diesel or finished products manufactured and sold in the United States in the last three months of 2010, a little more than 2 cents per gallon was earned. I repeat, two cents.

ExxonMobil owns less than 1 percent of the world's oil reserves, and produces less than 3 percent of the world's daily oil supply. The prices at your local neighborhood gas pump are controlled by operations around the world, and not just what is happening at ExxonMobil headquarters this week.

Crude oil, like all commodities, is affected by many factors such as production, demand, supply, and even the value of the dollar and other currencies. (All things that can also change the overall stock market as well.) The weaker the dollar, the less crude oil it will buy, meaning your fuel provider has to spend more dollars to get the same amount of fuel.

We can thank the good people of Iran for raising prices at the pump last week. A little more than one-third of the world's seaborne oil passes through the 34-mile Strait of Hormuz, the location of Iran's recent naval exercises and posturing. (And let's not forget the rescue of Iranian fishermen by the USS Stennis right down the road.) When seaborne oil can't move, lack of supply drives up demand, which drives up prices. Thank you, Mahmoud.

Closer to home, a little less threatening, and with fewer beards, state and federal taxes come in to play. Taxes in California are as much as $0.66 per gallon, while in Alaska they are merely $0.26 per gallon. Prices going up in your own community may be due to local regulation issues, and therefore don't go back to the profits at headquarters.

Last year, taxes and duties paid by ExxonMobil to the U.S. government topped $9.8 billion, which includes an income tax expense of $1.6 billion, for almost $59 billion over the past five years.

But what does that have to do with the cost of tea in China?

Well, everything actually. As long as there is conflict in the Middle East, oil prices will rise, due to demand, and disrupted supply lines. If the dollar is weak, oil prices will rise. If taxes are high, prices will rise. Add all of these factors up, and you are almost ready to figure out the cost of a barrel of oil.

The average cost to produce a barrel of oil, including exploration, development, extraction and taxes, is about $30, according to a U.S. Energy Information Administration survey. The price of a barrel of oil is around $101.15 right now. The record high for oil prices was most recently September 22, 2008, when oil settled at $120.92. (On that day, ExxonMobil shares were at $80.20.)

That's how much oil costs, but what about the shares in oil companies?

When gas and oil prices rise expect the five biggest oil companies (ExxonMobil, BP (NYSE: BP), Chevron (NYSE: CVX), ConocoPhillips (NYSE: COP), and Royal Dutch Shell (NYSE: RDS-A)) to report that they are flush with revenue. Exxon earned $10.7 billion in the first and second quarters of 2011, and $10.3 billion in the third. In fact, of the Big Five oil companies, all but BP reported quarterly earning increases last year. (BP, plagued with their sins in the Gulf of Mexico, saw first quarter earnings last year drop, due in large part to the $384 million spent on cleaning up their little spill.)

What does this tell you? While the US consumer was experiencing record high prices at the pump, the oil producers were making billions of dollars. Some might argue that oil companies are robbing the consumer and giving it to ... the consumer. Oil company profits help consumers by going into the mutual funds, pensions, and retirement funds of millions of people (whether or not they realize this is happening). But oil company profits and activities do not help communities by creating local jobs! And much of their profits are invested in business activities and production overseas. (Vote for a Republican in 2012 to see that get changed!)

But again, I repeat, what about the shares?

Much of the profit from higher oil prices goes into larger dividends for stockholders. But in the case of Exxon (and ConocoPhillips) more than $5.7 billion of their total profits went to buy back their own stock. Buybacks are almost guaranteed to send stock prices up, by boosting earnings per outstanding share, increasing the demand for the stock and sending a signal that the company thinks its stock is undervalued. And when the company sends that message, others out there scoop up the stock as well. And we all know what happens when stocks start getting bought up- the price goes up.

The nutshell version of all this would be – yes, when prices at the pump go up, oil companies make more money, and therefore the stocks become more desirable and valuable, and go up as well. You can work rising pump prices to your advantage by smiling and knowing that every time you fill up your car (except for you hybrid owners, you don't count), you are putting money into your stock portfolio, even if it doesn't feel like it.

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