J.C.’s Money Blog

Oil prices are running at nearly $100 a barrel, which means gas prices are high as well. Besides working on increasing fuel efficiency and cutting back on driving, there is another solution to make gas prices less painful: hedge them.

By finding an investment that increases as oil or gas prices increase, you can eliminate the impact of changing oil prices from your bottom line.

Take a look at this chart of recent oil prices.

If you look at a chart of XOM’s price change over the same period, you will notice the same trend, both have increased about 50%, which is logical because Exxon makes more money as oil prices increase, which means you as a shareholder are making more money.

Here is an investment strategy:

1. Estimate number of miles driven per year. ~ 10,000 miles per gallon
2. Estimate gasoline mileage of vehicle. ~ 20 miles
3. Calculate number of gallons used. ~500 gallons
4. Determine fuel cost at $3 per gallon. ~$1,500

An average American spends $1,500 on fuel at current gas prices. Unfortunately, its not possible to directly tie oil price, XOM’s profits, and price of gas, because there are too many factors, but the general price directions and rough order of magnitude is known. An investment of $5,000 in XOM would be a great hedge against rising gas costs.

If oil prices increase you spend more on gas, but make money from Exxon, but if oil prices fall you save more on gas, but make less money from Exxon.

So stop fretting over the oil companies taking you for a ride! If you can’t beat ‘em, join ‘em (or well, own them).