Market Beat: Hedging against oil spikes
June 23, 2014
The recent turmoil in Iraq has led many people to believe that the price of crude oil could spike and derail the economy.
Jay Leno once joked, "There was a sign at the gas station near by my house that said, 'We take Visa, MasterCard, Discover Card, and American Express.' After I filled up, they took my Visa, Master Card, my Discover Card, and my American Express."
The price of oil has a history of rapid price increases due to political conflicts. Recessions have followed oil spikes; however, there were other factors that contributed to those economic slowdowns as well.
During the Iranian hostage crisis in 1979, the price of crude doubled to $38 per barrel. Using an inflation adjustment, that equates to over $115 per barrel in today's dollars.
Oil spiked again during the first gulf war known as Operation Desert Storm in 1990.
In June 2008, oil reached an all-time high, averaging an inflation adjusted price of $135 for the month. The inflation adjustment was in January 2014 dollars using CPI data from 1946-2014.
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The global energy picture has changed quite a bit since the oil spike of 1979 during the Iran-Iraq conflict. Today, OPEC produces about 40 percent of the world's oil.
New drilling technologies have proven the "peak oil" theory wrong. The state of North Dakota is producing almost one million barrels per day, and the U.S. is very close to energy independence.
Even if the conflict in Iraq worsens, an oil spike may not be as devastating as it could have been in the past.
Renewable energy continues to play an increasing role as well. Last year, according to a study by BP, the demand for renewables hit a record of 2.7 percent of global energy consumption.
Investors can protect themselves from oil shocks in a number of different ways. One is to have exposure to the energy sector in your investment portfolio.
The price of leading energy producers can increase along with the price of oil. Several of the major energy producers in the US also pay some attractive dividends.
There are a few exchange traded funds that focus on the energy sector and specifically oil and gas exploration stocks.
ETFs that are based on crude oil and unleaded gasoline can also be added to your portfolio, and they may appreciate if gas and oil rise.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.
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