An Easy Way to Counter Rising Gas Prices

By David Berman

Stop whining about gas prices already! While radio talk shows and tabloid newspapers are obsessed with the topic, there is an easy solution to the rising costs of operating a car.

Buy a fuel-efficient hybrid? Not necessary. Siphon your neighbor’s tank? Never. The correct answer: Buy an energy stock.

While gas-angry consumers might take such a suggestion as an invitation to join the enemy, that is not the reasoning behind the move. Instead, think of it as hedging.

A proper hedge is an offsetting investment. In the case of an energy stock, it will tend to rise as gas prices take a bigger bite out of your income. And if the energy stock falls, it will probably be because oil prices – and gas prices – are also down. Either way, you come out of the transaction looking good.

Now is a good time to implement the strategy because the share prices of many Canadian oil producers are down sharply as volatility has returned to the price of crude oil – but retail gas prices remain curiously high.

On Thursday morning, oil fell as low as $95.25 a barrel, down more than 16 per cent from its high in late April. Meanwhile, Suncor Energy Inc. (SU) and Talisman Energy Inc. (TLM) have tumbled more than 16 per cent each from their respective highs earlier in the year.

Here are a few back-of-the-envelope numbers to illustrate how this hedging strategy might work. In scenario one, crude oil prices continue to decline and gas prices likely fall too, though perhaps with a delay.

Whatever money you sank into an energy stock will be worth less – but not a whole lot. After all, these companies are highly profitable with a substantially lower oil price. Meanwhile, lower prices at the pump translate into more money in your pocket.

Scenario two is far more interesting. The price of crude oil rebounds as demand for energy in emerging markets – read: China and India – continues to rise as consumers there grow more affluent. Gas at the pumps follows the trend.

Let’s say oil rises to $120 a barrel. The last time oil hit that level was May, 2008. Suncor shares then traded for about $60 and were on their way within a couple of weeks to a high of $72 – or about 85 per cent above the current price.

Now, if your car’s current gas bill is about $2,500 a year and climbing, and you invest $3,000 in an oil producer whose share price climbs 85 per cent, you’ve just made a capital gain of $2,550 – fully offsetting your current gas bill. And that’s not factoring in dividends, which are likely to climb.

Under this scenario, guests on radio talks shows will be apoplectic and tabloids will be fuming over supposed collusion among energy companies. But not you.

Disclosure: None