How to Keep Your Gas Prices Low

by Keith Fitz-Gerald
Thursday, December 18, 2008: Issue #903

Editors Note: Oil and gas are back in the headlines today. But we’ve heard very few good ways investors can take advantage of what – in all likelihood – will be a temporary price dip. Our colleagues however, just uncovered three easy ways to lock in at today’s low gas prices. We’ve attached the full article below from Keith Fitz-Gerald.

Many of my neighbors here in Oregon are enjoying the big decline in gasoline prices, particularly those who still own SUVs, pickup trucks or any of the other fire-breathing, piston-clanking monstrosities I’ve seen on the road recently.

And no wonder. Gasoline prices in our neck of the woods have fallen between 60% and 70% since July, when oil closed at a peak price of $145.29 a barrel. That means that my wife and I don’t feel like we’ve been mugged every time we fill up.

But what happens when the prices start going up again? Global demand for oil will fall this year for the first time since 1983 as the world financial crisis saps demand, the International Energy Agency said a week ago. That has some people believing that prices will remain low.

But I wouldn’t bet on it – at least not for long.

The Organization of Petroleum Exporting Countries (OPEC), supplier of more than 40% of the world’s oil, is making loud noises that it wants to see $75 a barrel again soon, which would represent a 70% increase from the $43.60 a barrel where oil closed Tuesday. It’s dropped lower since, and it’s still sliding down. Even after OPEC pledged to cut 2.2 million barrels a day from supplies.

If oil prices continue to sink, it becomes more likely we’ll see additional cuts. How much, is anybody’s guess, depending on who does the cutting and who actually abides by the agreement over time. But it’s a pretty safe bet to say that on a long enough timeline, gas prices are going back up. Here’s a few ways you can lock in today’s prices and hedge against another spike.

OPEC’s Ultimate Influence

Russia recently announced, after years of going it alone, that it wants to actually join OPEC. Now OPEC has asked Russia to cut oil output by between 200,000 and 300,000 barrels a day to help revive prices. And Russia may well do just that.

A price of $60 to $80 a barrel would be consistent with a global production cut of about 2.5 million barrels, and that’s a figure apparently supported by OPEC representatives we spoke to. Leonid Fedun, OAO Lukoil’s deputy chief executive officer, noted in a recent Bloomberg News report “there is a consensus [among members] to reduce production.”

This highlights something that’s often missed in the Western media, where the price of oil is typically associated with the price of gasoline and how that price impacts driving habits. According to CNN, MSNBC and a whole host of others, evidently that’s what matters to us.

But in OPEC-producing countries, it’s a different story. There the price of oil is more typically associated with external trade relationships and hard currency requirements that are policy level decisions often made at the expense of individual concerns. And I don’t have to remind you that most OPEC member countries don’t exactly specialize in freedom of choice, so the odds are high that what the energy ministers want, the energy ministers will get… but that’s a story for another time.

Here’s one other point to consider: With all the media’s focus on OPEC, there’s been little mention of China, India and the whole host of emerging markets that are still experiencing double-digit growth in oil demand. That’s not going away.

The bottom line here is that it would behoove interested investors (and people who like to drive less fuel efficient cars) to hedge any potential future rise in gasoline prices sooner rather than later. Here’s one quick and dirty way to do it.

Three Ways to Hedge your Gas Prices

If you drive 20,000 miles a year and your car gets 30 miles to the gallon at a time when fuel costs $1.75 a gallon, you are looking at an annual fuel bill of $1,166.67. If OPEC gets its wish and oil rises by 70%, gas prices may rise in tandem. Therefore, buying the equivalent share value of your projected annual fuel expenditure in such exchange-traded funds (ETFs) as the United States Oil Fund LP (USO), the iPath S&P GSCI Crude Oil Total Return Fund (OIL) or the United States Gasoline Fund LP (UGA) could be just the ticket.

As prices rise, so, too, will the value of your investments. If prices fall further, you’ll obviously lose money, but you’ll be paying less at the pump at the same time.

Granted, what I am proposing is not a perfect hedge. Among other things, there are potential capital gains to contend with when you sell 12 months from now – taxes, transaction costs and a whole host of other variables that could come into play. At the same time, you could simply alter your driving habits, which, of course, would change the value of your calculations midstream.

None of that really is material, though. Hedges are never perfect.

But they do offer you a chance of “being in the neighborhood” when it comes to protecting your wallet from what could be vastly higher oil prices to come.

Good investing,

Keith Fitz-Gerald

Today’s Investment U Crib Sheet

We all know that the price of oil has a big impact on our economy, and our wallets. But it can be surprising to find out just how much that is. For every cent that the price of oil increases, $27.3 million a week is taken out of the economy. That’s almost $1.5 billion a year.

So when gas prices climb or drop by $2 a gallon, like they have in the past six months, its impact is significant to say the least. But it doesn’t all go to the refiners, or even the gas companies. Here’s the breakdown for every dollar paid for a gallon of regular gasoline:

­­­­­­­­­­­Crude Oil 72.7%

Refining 10%

Distribution & Marketing 5.8%

Taxes 11.5%

As you can see, we can’t just blame the oil companies or our local gas station for the price we pay at the pump. But that doesn’t mean they’re not making money. Today’s Blackboard highlights three oil companies up almost 10% in the past month.

Comments

By submitting your comment you agree to adhere to our Comment Policy and Privacy Policy.

Check out our selection of daily investment research: