Last Thursday on 10 July 2008 I invested $703 when the All Ords was 5000. Today, Wednesday 16 July 2008, the All Ords has fallen to 4815. The market seems to be going down and down.
A closer look reveals that the problem comes mainly from financials and banks such as the Commonwealth Bank and NAB. Investors may be spooked by problems in America with Fannie May and Freddie Mac.
Energy companies listed on the ASX however seem to be fine. Based on my records, I have done 14,956 kilometers of driving since 17 February 2007. Since today is 15 July 2008 then that means that I drive on average about 10,000 kilometers per year. Since I have driven my car 14,956 kilometers and since my car's fuel economy is 11 liters per 100 kilometers, then it means I've used 1645 liters of petrol so far. Based on my records, petrol during 17 February 2008 cost $1.14 per liter and now on 15 July 2008 costs $1.61 per liter. That is a 41.22% increase. Because petrol has increased by this much, I have spent $773 extra on petrol. This means that if petrol prices continue to go up by this same amount and I do the same amount of driving as I have already done, I will pay an extra $500 per year. That is actually not that much. That is approximately how much is costs to sponsor a child from World Vision for one year.
Here is the the interesting thing. Since 17 February last year petrol has gone up by 41.22% but the stock price of Woodside Petroleum has gone up by 66.9%, the stock price of Oil Search has gone up by 57.7%, and the stock price if Santos has gone up by 86.4% These are all Australian energy companies. It seems as if these energy companies are doing very well under conditions of high petrol and oil prices.
So then what if I buy shares in energy companies as a hedge against fuel inflation? If I assume that share prices move exactly like petrol prices (which is unrealistic) then how much will I need to hold to fully hedge against any rise in petrol? After some number crunching, the answer is $1154. Not much. If I buy $1154 worth of shares in energy companies and if these energy companies' shares go up by the same amount as petrol prices, then I will be fully hedged. If petrol prices rise, I lose more at the pump but I am compensated by capital gains. If petrol prices drop, I make a capital loss but I am compensated by lower fuel expenditure.
Any Australian can buy shares from the ASX by signing up for Commsec. It just so happens that I have about $22,000 invested in a mutual fund. This mutual fund invests about 44% in Australian shares. That means $9680 is invested in Australian shares. Since this is an index fund, it tracks the ASX300 index. I know for a fact that 9% of the ASX300 is made up of energy companies. This means that I have already $871.20 in Australian energy companies. Therefore, I may already have a partial hedge.