How to Benefit From Higher Gas Prices in 2012

Yesterday, as I do just about every week, I filled my truck’s gas tank. As I watched the digits tick by on the pump (which finally stopped at $70.04), I winced, and pined for my all-electric vehicle. (I have a Nissan LEAF on order, to be delivered sometime in the spring.)

It turns out I’m not suffering alone. According to an article published by Jonathan Fahey of the Associated Press last week, Americans are spending record amounts of money on gasoline.

When the ball drops in Times Square in a few days, the typical American household will have racked up $4,155 in fill-ups this year. Ouch…

That’s a record, according to Fahey, and it’s a budget-busting 8.4 percent of the average family’s take home pay. That’s the highest it’s been since 1981. Unfortunately, another record was set in 2011, too. The average price we paid for all that gasoline was $3.50 nationwide.

While high gas prices are certainly a problem, we generally overlook them when the economy is strong, because we can afford them. The average bite gasoline took out of the family income was 5.7 percent for the last 10 years.

But those were relatively good times. Now most of the country remains mired in a recession, and even faced with a possible double-dip returning in 2012. High gas prices in times of economic strife are even more damaging to a family’s bank account.

A Look Ahead to Next Year

So what’s in store for next year? Even higher prices…

That will take its toll on consumer confidence, too. They’ll be reluctant to go out and spend money on other things.

There are two reasons gas is going up. The first is that a large percentage of U.S. gasoline is refined from Brent crude, since Gulf coast refineries have had little access to West Texas Intermediate (WTI).

With all the shale oil drilling that continues to ramp up, there’s more oil going into the giant Cushing Oklahoma facility than can leave. That has kept WTI prices depressed compared to Brent.

This lack of WTI supply has forced Gulf coast refineries to buy the higher priced Brent to keep their refineries running full tilt. That will begin to change when the Seaway pipeline reverses starting in 2012.

The second reason can easily be explained using simple math. The bottom line is this: Unless we all of a sudden reach zero global population growth, we’ll be using more energy around the world.

In 2011, the globe added 78 million more mouths to feed. It took all of human history until 1800 for the world’s population to reach one billion people.

But in just the past 50 years, the population jumped from three billion to seven billion. What does it all mean? “Sustainable growth” is an oxymoron… More people equal more food… More food means more energy… And more energy means more oil – lots more.

And it will be very expensive oil. It’s the simple laws of finite, dwindling supply, coupled with rapidly increasing demand. This is completely unsustainable.

We don’t have a Ph.D. in economics, and we don’t need one to understand this. Neither do you. All we need is to be reasonably good at simple math.

Prices will go up, just as they have this past week. WTI’s sitting about where it was two weeks ago: close to $100 a barrel. In 2012, WTI will continue to approach the price of Brent. Both will continue to increase for reasons mentioned above.

Three Great Ways to Ease the Pain At the Pump

It’s good news if you’ve loaded your portfolio with U.S. oil producers and transporters, all who will benefit from higher WTI prices. It all goes right to their bottom line, and to shareholders.

On the production side, a company like Continental Resources, Inc. (NYSE: CLR) is a great play on shale oil. As I said before, domestic companies such as Continental are going to benefit from higher WTI prices.

Pipeline companies like Kinder Morgan Energy Partnership LP (NYSE: KMP) with its recent purchase of El Paso Corporation (NYSE: EP) is a great play on oil and natural gas transportation. So is rail carrier Canadian Pacific Railway Limited (NYSE: CP).

Bakken production has outgrown the pipeline capacity for the region, especially with the delay of the Keystone pipeline. Much of the oil is now being shipped out in railroad tanker cars. That will continue to be the case, when and if the Keystone gets built.

You just have to learn to ignore the wild swings in price that seemingly occur on a weekly basis. Just remember: more people, more oil, higher prices. Simple.

Consider picking up and pipeline plays on dips in the market. You’ve certainly had a number of opportunities to do so over the last few months, and you’ll likely have more in the next few.

Good investing,

David Fessler

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