Higher Gas Prices Around The Corner

By Aaron Levitt | January 21, 2011 AAA

Worldwide economy growth is having some real untended consequences for the average consumer. Fueled by expanding economies and money supplies, a variety of commodities have all seen their prices rise in the last year. Everything from wheat to coffee has seen its price surge in the wake of economic expansion. For example, the iPath DJ-UBS Cotton ETN (NYSE:BAL) has nearly doubled as cotton has experienced shortages and new sources of demand. As consumers are already feeling the pinch in morning breakfast cereal, another commonly used commodity is beginning its run-up.
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Revisiting 2008
As crude oil resumes its climb towards the $100 mark, consumers are once again staring at the face of $4-a-gallon gasoline. According to data from the Oil Price Information Service, consumers last paid prices that high in September of 2008. Gasoline eventually reached a record high at $4.11 per gallon. Currently, the national average pump price stands at $3.09. That's already 4% higher than December's price and more than 12% more than a year ago. Diesel fuel has also seen similar price increases. Nationwide average diesel prices stood at $3.34 per gallon, up nearly 15% from a year ago.

Consumers are unlikely to get a break anytime soon. Gasoline demand usually dwindles from autumn to late February and pushes gas prices lower. However, the combination of a strengthening global economy, weaker dollar and increasing energy demand overseas will likely continue propelling prices into spring. The U.S. Energy Information Administration recently released its monthly forecasts and it expects gasoline to average $3.17 throughout 2011 or about 39 cents higher than last year. The kicker in the EIA's report is that there is a 25% chance that gas will hit $3.50 in June and a 10% chance of $4 by August. The EIA predicts crude oil to average around $93 a barrel this year. Roughly, for every $1 increase in crude oil, gasoline prices rise about 2.5 cents per gallon. Crude oil would need to be above $120 for most Americans to see a constant rate of $4 per gallon. However, increased drilling restrictions for the Gulf of Mexico, shock events such as the recent closure of the Trans-Alaska pipeline and general global demand certainly make this scenario possible. (For related reading, see Peak Oil: What To Do When The Wells Run Dry.)

Hedging Your Pump Prices
As oil and subsequently pump prices rise, there are opportunities for investors. A broad-based energy focused fund such as the Vanguard Energy ETF (NYSE:VDE) is a great place to start for investors interested in the space. Nonetheless, other portfolio prospects exist for those investors wanting more.

For investors wanting to play the direct rising price of gasoline, the United States Gasoline Fund (NYSE:UGA) follows a basket of gasoline futures and has soared as pump costs have increased. The fund charges 0.60% in expenses. Similarly, investors can bet on the price of crude oil via the PowerShares DB Oil (NYSE:DBO).

With many oil fields showing signs of declining production, new technologies will need to be created in order to squeeze more barrels out of these mature wells. This task has been thrust towards the oil service industry. The iShares Dow Jones US Oil Equipment Index (NYSE:IEZ) follows a basket of 44 different service companies such as Baker Hughes (NYSE:BHI) and Dril-Quip (NYSE:DRQ). The fund should prosper as the needs of the service industry increase.

Finally as a side play, with pump prices rising, fuel-efficient cars and vehicles become more cost effective. The Global X Lithium ETF (NYSE:LIT) tracks companies related to the lithium market such as miners and hybrid battery producers. As adoption of these technologies in the face of higher fuel costs increase, LIT should continue to do well.

Bottom Line
As the world's economy really begins growing again, higher gasoline prices are on their way back. Many analysts expect that will we see the dreaded $4 a gallon mark within the near future. Nevertheless, this pain at the pump can spell opportunity for investors. The preceding funds as well as the iShares S&P Global Energy (NYSE:IXC) offer portfolios a way to profit from these price increases.

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