How to Neutralize Your Peak Oil Risk

Lifestyle Risks from Peak Oil

In the US, we all have a large exposure to the risk of rising energy prices. In addition to the cost of gasoline, the whole US economy runs on oil, so a rise in the oil price is likely to affect our jobs and the prices of all our assets, including our homes. If other people have less money to spend and invest because of high oil prices, there will be a fall in demand for anything they were buying or investing in.

Housing prices in exurbs and suburbs where the car is the only available transport option are likely to be most affected because living there entails relatively high car use. If you live far from where you work, your expenses will not only go up with the price of oil, but the value of your home is also likely to fall, leaving you doubly exposed. In contrast, real estate which is centrally located or which is well-served by mass transit may show positive correlation with the price of gas, and hence serve as a hedge against the gas price.

This oil price exposure can be (imperfectly) hedged with investments in clean energy or oil price futures, but a more effective way to reduce your risk is to live close to your work. If you already live far away from most jobs and own your home, you can reduce your personal expenses by finding ways to telecommute or use mass transit, but the value of your home is still linked to the oil price.

Since this is a long term trend, you may be able to protect the value of your home by advocating for better public transit in your area, but given the time and effort this entails, a large allocation of your portfolio to clean energy stocks or oil futures is probably the best you can do. In addition to my own blog, Jim Kingsdale's Energy Investment Strategies is an excellent place to learn about investments available to the retail investor.

However, you should not underestimate the magnitude of oil's direct impact on your expenses. If you drive 30 miles round trip, five days a week, that's about 300 gallons a year, even in a 30 MPG vehicle. Each $1 increase in the price of gas requires $300 of extra income a year to hedge your exposure.

Driving an alternative fuel vehicle is not a hedge for oil price risk, since the prices of alternative fuels are highly correlated with the prices of petroleum based fuels, although a more efficient vehicle is a partial hedge.

Investments as a Peak Oil Hedge

For investments to hedge that expense, you will need investments that increase $6,000 to $8,000 for each $1 increase in the price of gasoline to produce $300 of extra income annually. Assuming you have found a portfolio which increases 10% for every $1 increase in the price of gas, you will need approximately $70,000 invested to hedge your commuting costs, and possibly as much again to hedge the price of your home.

Even with $70,000 to invest, most stocks or portfolios of stocks are an imperfect hedge against the price of gas. The best hedges in terms of correlation with gas prices are oil or gasoline futures, but trading futures is considerably less accessible than trading stocks, and does not produce income. Trading oil futures is a zero-sum game: for everyone who makes money, a counterparty loses money. In stock market investing, the internal profits of companies can provide a basis for a positive net return for all investors. That extra benefit and the opportunity to invest with my beliefs make me willing to accept the much weaker correlation clean energy stocks have with energy prices.

Better Than a Hedge, Reduce Your Risk

If you don't have $70,000 in your portfolio to neutralize your gas-price risk, or are uncertain of your portfolio's correlation to the gas price (most stocks will actually fall as the price of gas goes up,) it makes sense to find less gas-intensive options for your normal commute. Then, if fuel rises to a painful level, it will be easier for you to switch quickly to less fuel-intensive options.

Even though I live near my work, I've been doing just that, ever since I became convinced that better cars are not an effective solution (or investment response) to peak oil.

Comments

[cal48koho]

Utterly sensible article which answers the question of what concrete steps can we take in our day to day lives to mitigate the impact of peak oil. I might add a few others if eg moving is not an option. Sell the house and rent in your area. Do not buy a new vehicle that gets less than stellar gas mileage.Don't buy new at all if you can help it. Sell your mpg dog now while you can. Most of our car fleet will be scrapped long before it wears out.

[Plug-in]

Best solution: 'Become independent for energy and transport'
How?
1. Buy a Concentrated Solar system (CPV), see: peswiki.com/index.php/...
and enjoy fixed rate electricity as the grid price doubles over the next decade. Expectation is that CPV will cost about the same as grid prices today, when their cost is spread over their 20 year life.
2. Trade your oil-burning vehicle in on an Electric Vehicle (EV) or Plug-in Hybrid (PHEV), see: peswiki.com/energy/Dir....
Not only will you protect yourself from steeply rising energy prices, you also help the planet by becoming 100% carbon neutral for home energy and transport. If you are a business owner you can extend the idea to your business too.
These investment solutions are both expected to become avaialble within the next 3 years. CPV within 12 months - eg, Sol3G; GM Volt, for example by 2011. You can Google them both.

[SulianJimon]

Let's see here. Using your own example ($1==$300/yr), if gas were to double then we'd see roughly $900-$1000/yr extra expense. And this is going to have a noticeable impact on your house price?