How to Hedge $6 Gasoline Prices

This post How to Hedge $6 Gasoline Prices appeared first on Daily Reckoning.

Fuel prices are going to clobber the American consumer. If you think it hurts now, I have bad news… higher prices are coming.

I expect that gasoline prices will break $6 per gallon this summer. The only good news is that high prices cure themselves…it just takes pain and time.

The closest thing I have to compare is the 2008 demand spike right before the global financial crisis. Back then, soaring gasoline prices created massive demand destruction. We all felt the pinch.

So, we stopped driving and conserved when we could.

We carpooled. When we went out to run errands, we ran ALL of them at once. And we changed our plans to accommodate the extra expenses. As you can see in this chart of data from the Energy Information Administration (EIA), the blue line is consumption. The red line is the price of gasoline:

The fuel price rose 90% in a year and a half. Bottom to top, fuel rose 150% in 3.5 years. In response, fuel consumption fell 3.8 million barrels per day (21.5%) from December 2007 to May 2009.

That’s a huge decline in demand. And as the economy cratered during the financial crisis, gasoline price collapsed. You can see what I mean in the chart below:

This is spot price, so it’s a little different from the EIA data, which is a reformulated price. Regardless, the prices went from low to high. Really high. To put that in perspective, $4.10 per gallon in 2008 is equal to $6.34 per gallon in today’s dollars.

The price fell off so much, so quickly because at the time, 60% of the demand for oil came from personal automobiles. And if we all stop driving, there’s plenty of oil again.

Today, light duty vehicles (cars, SUVs, and motorcycles) use between 52% and 60% of U.S. oil demand. That means personal vehicles still have a major impact on demand. And when driving becomes a luxury, a huge swath of the country will conserve.

However, there will be pain in the short term.

The Strait of Hormuz remains closed. All over the world, governments are burning through strategic oil reserves. The reality is about to come crashing home this summer.

I expect gasoline prices will blow through that 2008 high price. It’s going to be a bad summer for road trips, just like back then. With the benefit of hindsight, there is an answer to that though – invest!

Everyone should do what the big companies do and hedge their fuel expense. That’s a fancy word for buying something that goes up with the oil price. And there’s a simple way to do it.

The United States Gasoline Fund (NYSE: UGA) is a simple, liquid exchange traded fund (ETF) that tracks the gasoline price using options. That’s the only downside to the fund. It doesn’t actually own gasoline… because that’s not feasible.

Another simple way to play this trend is one of the refining ETFs like the VanEck Oil Refiners (NYSE: CRAK). This tracks companies that make money from refining margins. That’s not ideal, because oil prices are going up too.

However you do it, you absolutely must invest now. Rising fuel costs are going to hit every part of our lives. Even if you drive an electric car and have a stack of solar panels on your roof…you’ll still be impacted.

Now is the time to let your investment portfolio offset some of those expenses.

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