Americans Are Still Driving Less

The latest report from the U.S. Department of Transportation shows that Americans are still driving less, but the rate of decline appears to have stabilized. The impact on public companies, especially refiners and retail gasoline suppliers, will depend on whether the change is permanent. (Read our related article, Getting A Grip On The Cost Of Gas.)

IN PICTURES: Vacation Savings Tips

The Statistics
The Traffic Volume Trends report is published monthly and compiles the total number of miles driven on roads in the United States. The report for March 2009 shows that miles driven declined by 3.1 billion, or a decline of 1.2% compared to March 2008. Cumulative travel for 2009 is down by 11.6 billion miles or 1.7% from 2008, while miles driven in 2008 fell by 3.6%. These figures raise profound implications for many public companies that benefit from the excessive driving habits of many Americans. The issue, of course, is whether this change is permanent, or has the recession and deleveraging induced a temporary adjustment in behavior.

Most of the demand for oil in the U.S. is for transportation which comprised a 70% share of U.S. oil consumption as of 2007. Since 44% of all petroleum consumption in the United States can be attributed to gasoline, it is certain that the refiners like Frontier Oil (NYSE:FTO) and Valero (NYSE:VLO) are impacted by any long-term demand trends. However, that impact is not all that clear as there are many moving parts to the profitability of a refiner. If oil prices fall long-term because Americans change their driving habits, this will make the feedstock of the refiners cheaper which, all things being equal, is a good thing. But, if that fall in demand for gasoline leads to lower usage, then margins may fall.

What It All Means
Prices are also impacted by the amount of imported gasoline from other countries. Seasonal demand changes are also a factor, since driving demand in the summer months is generally higher. Valero just delayed some capital spending on two refinery projects in Louisiana and Texas, citing the uncertain state of the economy as the cause. Frontier Oil reported a profit in its first-quarter earnings but management was cautious. "We are hopeful that the U.S. driving season will provide a seasonal boost, but we do not foresee significant improvement in demand or product margins without an accompanying U.S. economic recovery," said Mike Jennings, the CEO.

Many refiners also sell to the end user and earn profits on retail marketing. Sunoco (NYSE:SUN) owns 4,700 retail gasoline outlets in 24 states. Unfortunately, Sunoco's retail marketing division only earned $6 million in the first quarter of 2009. Murphy Oil (NYSE:MUR) produces oil, refines it at its three refineries in the U.S. and England, and then sells it to the end customer through its network of more than 1,000 retail outlets. Murphy Oil has an agreement with Wal-Mart (NYSE:WMT) to locate many of these outlets adjacent to the company's store locations.

The Bottom Line
It's clear from statistics complied by the U.S. Government that Americans are driving less during the recession. What's less clear, and much more important for investors, is whether such a change is permanent or simply a by-product of less consumption and more savings by Americans. (For more, see The Industry Handbook: the Oil Services Industry and Oil And Gas Industry Primer.)