Markets Don’t Stay Bad Forever: Cycles, Trends, and an Oil Refining Example
By Bill Conerly,
Conerly Consulting, Businomics,
Valero Energy Corp. is selling oil refineries that it had bought a few years ago. We used to have a shortage of domestic refining capacity, but now we have an excess—even though there has not been a new refinery built in the United States in years. Capacity at existing refineries was expanded through new technology, our demand for refined products lagged, and imports of refined products have increased, thanks to expanded capacity overseas. (It used to be that only crude oil was shipped in, but now gasoline and diesel are imported in tankers.)
Who would buy those refineries from Valero? One very sharp businessman named Thomas O’Malley, the same guy who sold the refineries to Valero back in 2005. He’ll likely pick up his old properties at a steep discount to the price he received for them near the peak of the market. The Wall Street Journal quotes O’Malley: “Markets don’t stay bad forever.”
O’Malley sounds wise, but let’s no go overboard. The buggy whip market never did come back. Carburetors, vacuum tubes, asbestos …. The list goes on. Here’s how we economists think about these things. Begin with a long-term trend. (We often say a “secular” trend.) That could be upward (Internet advertising) or downward (newspaper readership.) Now add a business cycle. Advertising is very cyclical, and has suffered in both print and on-line media during the recession.
Most markets will, indeed, bounce back in the recovery, but some will bounce higher than they ever had been before (rising trends), while others will bounce back but never recover their past peaks (declining trends). The danger in O’Malley’s words (which I would guess he understands) is that the opportunistic buyer at the cyclical low had better pay a price that reflects the long-term trend after the recovery is over. I can easily envision newspaper investors being forever disappointed, even though they bought at a cyclical trough. On the flip side, I can also envision investors passing up great opportunities because they see the recent cyclical downturn but confuse it for a long-term trend. This is one of the reasons that it’s wise to bring in an economist, and ask for an analysis that includes both the long-term and the short.
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