Protect Yourself From Spiking Energy Prices

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For all the damage that it did to your personal finances, 2008's market meltdown did bring one fringe benefit: It cut energy prices down to size. But with prices at the pump creeping back upward, you may be wondering if it's too late to take steps to try to offset the added costs of getting around and heating your home as winter fast approaches.

What's going on?
Fortunately, we're still a long way from the $4-per-gallon prices we paid for unleaded gasoline back in the summer of 2008, at the peak of the oil boom. But prices have started to creep up toward the $3 mark on a national basis, and plenty of states in the Northeast and on the West Coast have already topped out above $3.

What's particularly surprising about the move is that winter is typically a slow season for gasoline use. Compared to the summer months, when vacationers take long trips and do a lot more traveling, demand in the winter is usually much more restrained. But those factors haven't stopped crude oil from moving above $90 per barrel recently, and heating oil prices have also moved upward in tandem. Even natural gas, which has been mired in a long spell of rock-bottom prices, showed signs of life in bouncing from below $4 in mid-November to around $4.50 now.

But on the other side of the supply and demand equation, several refiners are doing maintenance on their refineries, which can obviously reduce production of gasoline and heating oil. ConocoPhillips (NYSE: COP  ) had some planned maintenance go badly at one of its refineries, resulting in a longer than expected shutdown. Other refiners are expecting to do similar work in 2011, with Tesoro (NYSE: TSO  ) , Valero (NYSE: VLO  ) , and Shell (NYSE: RDS-A  ) among those shutting down refinery units during parts of next year.

What you can do
Of course, the perfect time to hedge yourself against the added costs of high energy prices is before they rise. In some areas, you can arrange with utility providers for fixed-price options that protect against price movements. You may pay an additional fee for that security, and if prices move down, you may be stuck paying the higher price. But in situations like what we've seen lately, you don't have to worry about a price spike breaking your budget.

But even after the rise, some exchange-traded products may give you the security you're looking for going forward. The United States Gasoline Fund (NYSE: UGA  ) and United States Heating Oil Fund (NYSE: UHN  ) own unleaded gasoline and heating oil futures, respectively. When prices move up, the value of these shares also rises. By choosing a number of shares that corresponds to the total value of your expected gasoline or heating oil usage, you'll offset any higher prices you pay with gains from your investment.

As with many derivatives-based ETFs, you have to be careful with these products. They're structured as partnerships, which can mean some pretty complicated tax reporting come April. And depending on seasonal factors in the futures markets, your ETF shares may not move the way you expect them to. But at least for heating oil, those seasonal factors actually help you; prices typically peak in winter and fall slightly in spring, in contrast to the contango that has afflicted the related United States Natural Gas Fund (NYSE: UNG  ) .

A simpler approach
An alternative to custom ETFs is simply to buy shares of energy companies. Energy stocks won't move completely in tandem with energy prices, but there is a fairly strong correlation. You can stick with integrated oil and gas giants for broad energy coverage, or drill down on producers of particular types of energy in particular areas that match your individual exposure.

No one likes to spend more on gas and utility bills. Fortunately, some believe that these supply and demand factors are temporary and that prices should start to fall in the near future. But if you're afraid that the recent move up is just the beginning of a more disturbing trend, then these moves can help reduce the pain of higher energy costs.

Getting your expenses under control is a key way to make your money go further. To get more tips that will help you retire earlier, click here to read the Fool's new special report, The 7 Secrets to Salvage Your Retirement Today.

Fool contributor Dan Caplinger is tired of single-digit temperatures already. He doesn't own shares of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy keeps you warm at night.

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  • Report this Comment On December 13, 2010, at 9:04 AM, CharlesRuther wrote:

    For a simpler and less expensive option you can also use a service like Tomorrow's Gas.

    They charge you a monthly fee to lock in the price for several hundred gallons of tomorrow's gas and if the price goes up they send you a gas card to make up for the more expensive gasoline prices. It's

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