Why Is Big Oil a Drag on the Dow?

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A decade ago, oil hovered around $30 per barrel, and you could find gasoline for about $1.50 per gallon. Fast-forward to today, and the price of oil has more than tripled to $94 per barrel, and gas averages $3.20 per gallon nationwide.

This spike in energy price may make you think that oil stocks are the stars of the Dow Jones Industrial Average . For a few years that was true, and ExxonMobil and Chevron outperformed the broader market, but the trajectory has changed in recent years.

Chevron has barely kept pace with the Dow Jones Industrial Average's total return over the past five years, and ExxonMobil has been a huge laggard. This is despite the sky-high cost of oil and gasoline, which you think would be lining investors' pockets. But some troubling trends are emerging that may make big oil a laggard for years to come.

XOM Total Return Price Chart

XOM Total Return Price data by YCharts

The rise of efficiency and alternative energy
When oil prices began to skyrocket in the mid-2000s most customers didn't blink. A few extra dollars to fill your SUV wasn't a big deal until the recession hit. That's when behavior really started to change. Fuel efficiency became "cool," and automakers responded by improving efficiency in everything from small cars to SUVs. Even natural gas vehicles and electric cars began to hit the streets.

The result has been a swift decline in oil consumption in the U.S. As you can see below, the trend isn't just domestic, it's happening in Europe, as well.

US Oil Consumption Chart

US Oil Consumption data by YCharts

Some of this is driven by the weak economy, but we can't avoid the fact that people are trying to get more out of every dollar spent on gas. That's created a limit on demand, and how high the price of gasoline can go, which both impact big oil's top line.

Squeezing the bottom line
The top line is being squeezed by falling demand in developed countries, but the bottom line is being squeezed by the fact that we're running out of cheap oil. Drilling in shale deposits in the U.S. only became popular when it became economical. It's far more expensive than conventional drilling, so the per-unit cost of oil is higher for explorers. The same trend is happening offshore, where huge deposits are being discovered over a mile under the ocean's surface. Problem is, that's an expensive place to drill for oil.

These trends of more expensive oil have limited exploration profits for oil companies. Combine that with a small spread between the price of oil and the price of gasoline -- known as the crack spread -- and you have low refining profits, as well. This has resulted in declining profits over the past two years, as you can see below.

XOM Net Income (TTM) Chart

XOM Net Income (TTM) data by YCharts

The problem for big oil is that I don't see these trends changing. Oil isn't getting cheaper to extract, or easier to find, so supply costs are going up. There's also little appetite from consumers to spend more on gasoline. When a 40-mpg car or an electric vehicle is a viable alternative to a gas-guzzler, it's tough to increase the price of gasoline. Big oil is being squeezed from both sides.

Foolish bottom line
Big oil has been a laggard on the Dow for the past few years, and I see the trend continuing. We won't stop using oil overnight, but it's definitely not the growth business it once was. That presents problems for oil stocks.

Now opportunities emerge in energy
Big oil may be struggling with falling margins, but that presents opportunities for companies that service the oil industry. The Motley Fool's chief investment officer has hand-picked one such opportunity in our new report: "The Motley Fool's Top Stock for 2013." To find out which stock it is and read our in-depth report, simply click here. It's free!

The article Why Is Big Oil a Drag on the Dow? originally appeared on Fool.com.

Fool contributor Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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