How to Hedge Against High Fuel Prices
Gasoline and diesel prices are higher than they have ever been. At the same time, oil companies are reporting record profits.
It’s completely understandable why the public would be outraged by this. If my cable bill doubled — and I saw that my cable company was making record profits — I would be outraged as well.
The thing is, oil isn’t priced like cable, or like iPhones, for that matter. The cable company decides how much it will charge for various services. Believe it or not, that’s not how oil and gas are priced.
Chevron’s (NYSE: CVX) executives don’t sit around a boardroom and decide how much they will charge for oil or gasoline. Those prices are set in a market, much like the stock market. Chevron doesn’t know where oil prices will be in the future. The company tries to forecast price trends and then makes plans based on those forecasts.
Sometimes oil companies are wrong about energy prices, and you will see them lose lots of money. For example, “Big Oil” firms lost $76 billion when oil prices plunged in 2020. They also lost a lot of money in 2014 and 2015 when OPEC flooded the market with oil.
Think about it. If oil companies set prices based on costs — or on how much money they want to make — do you think oil prices would ever be negative? Do you think they would ever lose money? How often do you hear about Apple (NSDQ: AAPL) or your cable company losing money? They don’t, because they are not at the full mercy of the commodity markets.
Just last week, someone said to me “I wish my paycheck would rise like these gas prices.” I advised him the same way I advise many people who express this sentiment. It can. Just buy shares in an oil company.
Let’s look at some numbers. Over the past six months, the average retail price of gasoline has risen from $2.12 a gallon to $4.62 a gallon (Source). The average family uses about 1,100 gallons of gasoline a year. That means that annualized fuel costs have risen by $2,750 for the average family in just six months.
That’s a significant amount of money for most people. It consumes discretionary income, and at the same time enriches the oil companies.
But let’s say that six months ago we wanted to hedge against this risk and bought some shares of Chevron. At that time, Chevron’s shares were trading at $116. Today they are 53% higher at $178. Each share of Chevron appreciated by $62, which means if you had owned 44 shares, the gain over the past six months would have equaled the increase in this year’s fuel costs.
Those CVX shares also would have paid you $125 in dividends during that time — enough for a couple of tanks of gasoline.
Of course, there are two big caveats. Those 44 shares would have cost you $5,100 six months ago. Not everyone has that kind of money available to invest.
The other big caveat is that oil company shares fall when the price of oil goes down. At one point in 2020, Chevron’s shares had fallen by over 50%. That’s the risk in hedging. Yes, you can tie your paycheck — in a way — to the rise and fall of oil prices. But it’s a double-edged sword that doesn’t always cut in the right direction.
I should add that this isn’t the only way to hedge against higher fuel prices. You can always switch to an electric vehicle, and walk or bike as often as you can.
But there’s one thing you would learn if you did invest in an oil company. It’s a tough business. Times are good for them right now, but sometimes they are very, very bad.
Editor’s Note: Are you looking for inflation hedges that also provide income? Consider the advice of our colleague, Dr. Joe Duarte.
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