Why I’m Not Concerned About Rising Gas Prices

By: GenXinvestor

Rising gas prices have been a hot topic this week. I recently gassed up my vehicle at $1.42/litre…Ouch! At that price, it cost me about $8 more a week to drive. But $1.42/litre must seem like a bargain for those living in Vancouver where the average price for a litre of gas is $1.54!

Every Spring it seems that Canadian consumers are hit with soaring gas prices. And, as usual, the analysts lay blame on a variety of factors: the beginning of the summer driving season, supply disruptions/refinery problems, and geopolitical instability in the Middle East and North Africa that could cause a supply disruption in the flow of crude oil from that region.

Whatever the cause of rising gas prices, it’s still no consolation to the average consumer who feels powerless in the face of it all. After years of rising gas prices, and with seemingly no end to it in sight, complaining about the price of gas has become as common a Canadian past time as complaining about our tax and health care systems.

And, of course, media outlets have everyone whipped up into a gas-buying frenzy with sensational headlines, such as the CBC’s “Brace for 3 more months of pain at the pumps.” I’m always amazed at how gas prices can increase by a few cents a litre and there are lineups of cars at every gas station for miles around. I can’t help but think that, if only those people who are trying to squeeze every last drop of gas into their jerry cans had purchased some shares in some of Canada’s blue chip energy companies, maybe they wouldn’t be feeling the pain at the pump so much.

After all, it’s no secret that for decades now, energy prices have been on the rise. In fact, rising energy prices have made the development of Canada’s energy resources possible in the first place. The development of Canada’s natural resources is transforming our country into an energy powerhouse. That’s why investing in the Canadian stock market in general and in the energy sector more specifically serves as a hedge to rising energy prices.

What I’m suggesting here is a strategy that involves hedging our exposure to commodity prices that we have no control over, by owning shares in the companies that produce them. This is not a new strategy. In fact, historically speaking, investing in the stock market has been a hedge against inflation as it offers investors some protection from rising prices over time. Buying shares in companies that produce the goods that we use is a great way to protect (ie. hedge) yourself from rising prices (inflation).

I must admit though that I have mixed feelings when it comes to rising gas prices. On the one hand, as a consumer, I’m feeling the pain at the pump like everyone else. On the other hand, as an investor with a large position in the Canadian market, that pain is offset by the excellent performance of my investments (see My Investment Portfolio). After all, rising fuel and energy prices are good news for anyone who owns Canadian index funds or ETFs. It’s even better if you own shares in some of Canada’s blue chip energy companies such as Suncor (SU-T) and Imperial Oil (IMO-T).

After years of trading sideways, Canadian energy stocks are finally helping to lift the TSX to all-time highs. Comprising about 26% of the index, the energy sector is the second largest weighting after financials. Since February, the energy sector has steadily risen nearly 28% as measured through the iShares S&P/TSX Capped Energy Index (XEG-T). That compares to the 11% gain of the broader TSX as measured by the iShares S&P/TSX 60 Index (XIU-T). Two of Canada’s energy heavyweights, Suncor and Imperial Oil, have even raised their dividend payout for 2014. In general, things are looking up for the energy sector. As the western Canadian oil glut gets relieved by increased rail car capacity and by having the pipeline issues come to some kind of resolution, these companies will be increasing their production and handsomely rewarding their investors with share buybacks and increasing dividends.

So that’s why I’m not at all concerned about rising gas prices. I could have written a post that just complained about gas prices and oil company profits, but instead I chose to write about how the average person can participate in the rally in the energy sector and lessen the impact of higher gas prices on their monthly budget by owning some shares in those companies. While the recent spike in gas prices may seem distressing, it’s important to remember that it’s simply a continuation of the long term trend of rising fuel and energy prices. That’s why as consumers we need to hedge out our exposure to volatile commodity prices by investing in the companies that produce them.

Disclosure: I am long Suncor (SU)

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