Long CDUs, short GPUs
The Gist: (1) The value proposition for the internal combustion engine and transportation fuel demand could be shifting back in favor as electricity prices soar and tax credits disappear. (2) Refining capacity growth is set to slow meaningfully after-2026 setting up a favorable environment for crack spreads. (3) Refining performs best in an early/mid-cycle recovery on rising cash flow so the risk is that we are in the late stages.
In 2020, the internal combustion engine (ICE) faced what looked like an existential threat. Alternatives such as EVs and hybrids surged from ~4% of light-duty vehicle sales to just over 21% today. At the same time, electricity costs fell sharply relative to gasoline.
Adding fuel to the fire, U.S. consumers were handed more money than at any point in the last 70 years.
With those stimmies, Americans bought houses, NFTs, profitless SPACs—and, yes, electric vehicles.
Fast forward to today: home prices are starting to roll over, NFTs now sell for what they’re worth ($0), and most SPACs never made it. My favorite SPAC from my sell-side days was one pitching flying cars (ha!).
Meanwhile, electricity prices are now rising faster than nearly everything else in the economy—thanks to the bitcoin boom, surging EV charging demand, and power-hungry data centers. (HERE).
If this power demand trend continues, we could soon reach a point where the marginal buyer starts to think that filling up with gasoline powered vehicle is more economical than to recharging and EV. And let’s not forget: by month’s end, the IRA’s EV tax credits will also expire.
Turning to refining, updating my capex chart and annualizing 1H 2025 results shows capital spending is at the lowest levels since the post–WWII years—when companies first began breaking out this segment data.
