Higher Oil Prices Are Coming Back [2018]

“This model comes with black alloy wheels.”

The salesman wiped a bead of sweat as he waved toward a maroon and chrome monster. We stood in the April sunshine looking at a row of gleaming pickup trucks. There were dozens of them.

“Yes, but what kind of mileage does it get?” I asked for the millionth time.

Last year I bought my first new car since 2003. It’s a shiny new black pickup truck with 280 horsepower. It boasts a 3.5-liter V6 engine with a six-speed automatic and all-wheel drive. And it came with black alloy wheels…

I can throw my surfboard in the back and drive right out on the beach.

But here’s a secret: I made sure it got over 20 miles to a gallon in town. I promise you, I was the only truck buyer asking detailed questions about gas mileage.

The salesmen talked about towing capacity and bed volume. I don’t care.

I care about how much it’ll cost me to run when oil prices get high again. That’s because oil prices are coming off a bottom. And one thing I know about oil prices is they go further than you think they can.

Higher Oil Prices Are Coming Back

In 2014, in Abilene, Texas, I had lunch with two bankers who lent money to the oil industry. These two were the best lenders in the area because they were the most conservative. They based all their loans on an unthinkable price of $40 per barrel.

Folks laughed because everyone knew we’d never see $40 per barrel again.

By 2016, the oil price fell from over $110 per barrel in 2014 to under $30 per barrel. Abilene’s economy crashed hard along with most of Texas. Even though they knew better, no one saw that crash coming.

Overconfidence is a foolproof indicator.

Now we’re in the opposite situation. After three years of sub-$60-per-barrel oil, caution is gone. No one seems concerned about high oil prices anymore. The most extreme example comes from the car industry.

Ford decided to cut all its passenger cars to focus on trucks. It’s killing off any vehicle that gets more than 20 miles to a gallon around town. Ford is making a bet that Americans will remain wealthy enough to drive gas-guzzling trucks for the next several years.

That’s fine when gasoline is under $3 per gallon, but what happens when it goes up?

From 2011 to 2015 we paid between $3 and $4 per gallon. Those days could come back. It will cost us a lot more money.

According to the Federal Highway Administration, the average American drives 13,500 miles per year. The table below shows what it costs to drive different vehicles at different fuel prices.

As you can see from the table above, an increase from $2.50 per gallon to $4.00 per gallon is a 60% increase in fuel costs. That’s some serious inflation. A truck owner will add $1,350 to their fuel cost per year.

As a science guy, I track my gas mileage. My new truck gets around 21 miles per gallon. That means I can expect to pay another $1,000 per year in fuel if the oil price spikes. My wife’s car will be similar.

You better believe I’m investing with that in mind. I’m hedging my risk of another $2,000 in fuel costs by owning oil companies.

As I told you back in this July 6 essay, you should do the same thing.

Good investing,

Matt Badiali

Editor, Real Wealth Strategist