Investment Contrarians

How to Benefit from High Gas Prices

By for Investment Contrarians |

Benefit from High Gas PricesI’m not sure if you realize this, but the gasoline prices at your pumping station have been on the rise for the last 21 days, based on data from the U.S. Energy Information Administration (EIA). Market watchers blame the rise on industry factors, but we all know that a major reason for the higher prices at the pumps is the greed of the big oil companies that are always looking for reasons to drive gas prices back upward, to make big profits. Isn’t that what America is all about? Screw the small guy!

The price of regular gasoline averaged $3.54 per gallon across the United States as of February 4, up nearly six cents from a year earlier, according to the EIA.

The price of regular gasoline was a mere $1.19 a gallon back on August 20, 1990, and it peaked at $4.05 on July 14, 2008. The low point for gasoline prices was $0.88 per gallon, last reached on February 22, 1999. (Source: U.S. Energy Information Administration web site, last accessed February 11, 2013.)

In my view, the age of cheap gasoline is over—at least here in the United States. You can always move to Venezuela, where the heavily subsidized gasoline costs a mere $0.09 per gallon; instead of paying $120.00 to fill my SUV here, it would cost just over $3.00 for a fill-up in Venezuela, making for some great road trips that wouldn’t empty my bank account.

The oil companies are ripping us off, and it has little to do with the oil prices.

In July 2008, gasoline was priced at $4.11 per gallon. The WTI oil prices at that time peaked at $145.00 a barrel, so the high gasoline prices at that time made sense. During the recession, WTI oil prices fell to $30.28 a barrel and rallied from there with the economic recovery. WTI oil was priced at $95.83 a barrel just last Friday. Looking at these numbers, it’s apparent that something is wrong. Let’s just take a simple comparison. In July 2008, oil prices traded at 35.3-times the price of gasoline at a ratio of 35.3:1. The ratio stood at 27.1:1 on Friday. Now, if you use the 35.3:1 ratio with the current oil prices, gas should be priced at around $2.72 a gallon. While this analysis is too simplistic, it is clear that there’s a mispricing happening here, based on the relationship between oil prices and gasoline prices.

In my view, there is absolutely little connection between oil prices and gasoline.

The reality is that according to figures for August 2012, government taxes account for 11% of the cost of a gallon of gasoline, with seven percent for distribution and marketing, 18% for refining costs and profits, and 64% for the cost of the crude. (Source: Ibid.) In other words, the oil companies are lining their coffers at the expense of the consumer.

The problem is that America is dependent on foreign oil to satisfy the country’s immense thirst for gasoline. The greedy oil cartel Organization of Petroleum Exporting Countries (OPEC) controls much of the world’s oil, and it dictates global oil prices by adjusting its production quota when the ultra-rich oil tycoons wine and dine at their regular meetings. Gas prices in these OPEC countries are some of the lowest in the world, which shouldn’t be a surprise.

In reality, oil prices must be controlled and gasoline prices should be regulated. Don’t open up the country’s oil reserves. The Keystone Pipeline System from the Canadian tar sands to the U.S. will help, but the environmental impact from extracting oil from the tar sands is a major issue.

If the high gas prices are here to stay, which I feel they are, then you need to load up on the oil refiners and downstream operators selling gasoline. In other words, if you can’t beat the oil companies, then you may as well buy the stock and reap the profits.

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