Thursday, December 11, 2008

Hedging the Cost of Energy

What an exciting year for energy! If you were an investing genius like me, you bought high and sold low. All is not lost, however, because my investments in energy were (mostly) just a hedge, so they did exactly what they were supposed to do.

For example: my electric bill is about $100 per month, so in January I purchased $1200.00 in Dominion directly through Dominion DRIPS. Today, my stock is worth $1,020.98 (though I have more shares because of dividend payments). Even though the value of my stock went down, my energy costs went down, which should offset the loss. I'll be investing another $1200.00 next month.

Maybe you don't pay an electric bill, but you do put gas in your car. I decided to look at my last year of spending on gas, lined up against the average price of a gallon of gas in the US:

I spent an average of $119.02 every two weeks, or $2,856.42 for the year. This number is slightly inflated if you consider that I pay for gas with my American Express Blue Cash card, which rewards me 1.0% on gas for the first $6,500.00 per year I charge on the card, and 5% on gas after I pass the $6,500.00 mark. As of October's statement (11 months), I had earned $247.54 on $6,249.73 spending (including Gas,Grocery, & Drugstore).

So what does all this mean? If I spend roughly $3,000.00 a year on gas, I should be hedging that amount in an equivalent energy hedge. That way, if the price of gas goes up, the value of my hedge goes up as well. If it goes down, even though the value of my hedge is reduced, so is the amount I spend on gas. This way, I'm don't get it coming and going when commodity prices fluctuate (which they are expected to through 2010 as we ease out of the current recession).

Now, where do you park your money? You could buy stock in Exxon-Mobile (a company forged in the fires of hell from pure evil), Shell, Chevon, BP, or any other company with a big stake in US retail gas sales. You could invest directly in oil through an exchange traded fund (ETF) like USO. You could invest in the broader energy market through an ETF like Vanguard's Energy ETF.

However you decide to hedge, it's something you should put on your list of New Year's resolutions.

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