Wikinvest Wire

The math behind the latest Big Oil PR campaign

Monday, May 05, 2008

After spotting this Big Oil ad for about the tenth time in recent weeks, looking at the math behind the ad copy seemed like a reasonable exercise to undertake.

[For the entire ad, see this item(.pdf) at Energy API.]

Based on a study of U.S. oil company ownership conducted last year, among other things, the ad states:
Tens of millions of Americans have a stake in the U.S. oil and natural gas industry. When the industry’s earnings are strong, the real winners are middle-class Americans, people investing in their retirement security or saving for their children’s college education.
And of course they go on to rail against the ill-effects of higher taxes on energy company profits - how higher taxes would hurt not only them, but middle-class Americans as well through their investments.

What is left unspoken here is that high energy prices aren't such a bad thing because the middle class benefits as shareholders.

But is that true at all for the "middle-class Americans" cited in the advertisement?

Let's find out...

For example, assume that the average "middle-class American" has a 401k retirement account or other investment accounts with a balance of $90,000, which seems reasonable after looking at the $40K to $80K income range across all age groups in this report.

Then figure that they hold an average of 70 percent in stocks and that all this money is in an S&P500 index fund with a weighting of about 13% for energy stocks (per the S&P500 sector weightings) resulting in a total energy stock value of $8,190

Investment in energy stocks: $90K x 0.7 x 0.13 = $8,190

Using data from the DOE, it appears that retail gasoline prices have risen from about $2.80 last summer to about $3.60 today for a hefty increase of about 28 percent. So, since a typical middle class American consumes 500 gallons of gas per year and, assuming a roughly linear increase in the gas price since that time, an additional $133 has been spent on gas over the last eight months.

Increased gas cost: 333 gallons * $0.40 = $133

That seems like a lot of money for a middle class family trying to make ends meet. Now, how much of this has been offset by rising prices for energy stocks?

Well, things were pretty volatile last summer, but it's fair to say that the giant energy ETF (AMEX:XLE) was at about $70 when gasoline prices started rising. At around $82 now, that's a hefty gain of 17 percent which, when applied to the typical middle-class American's investment portfolio,would yield a whopping gain of well over $1,000.

Increased stock value: $8,190 x 0.17 = $1392

Hey, maybe Big Oil companies aren't that bad after all!

Of course this doesn't consider those middle class individuals who have no 401k account at all or who are now too scared to death to invest in anything but FDIC insured CDs now yielding about two or three percent per year.

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To learn more about investing in natural resources using commonly traded ETFs, stocks, and mutual funds, see this description at Iacono Research. Or, sign up for a free trial.


Anonymous said...

YOu have got to be kidding me! This can't be right.... Tim, you are starting to sound like you want to be on Kudlow's show.....


Tim said...

CG - you know I started writing this not knowing what the answer was going to be and I was a bit surprised at how the numbers actually turned out.

odograph said...

That is amusing, but I'm afraid broad indexes might also include at least as many "energy-vulnerable" stocks ... airlines perhaps?

Anonymous said...

One result is pre-income tax while the other is post-income tax. Also, higher fuel prices feed higher prices for other items like, food, heat, etc. Gap is likely much smaller but still net positive. Problem is the population as a whole cannot buy energy stocks to offset rising living costs. There is no net economic benefit to a rising cost of living. But of course, energy companies and the rising price of fuel are not the culprits here. Your savings have already been stolen by the money changers and this is now being manifest by rising prices.

Anonymous said...

I think we should put windfall taxes on Microsoft each time they produce a new version of the OS. Also, we should tax a drug company everytime they come out with a new popular drug. The people must get a fair share.

Mathlete said...

People are irrational. They get emotional about the prices they pay everyday, especially things they need versus what they want, and don't think about the prices of things they pay infrequently. Anyone who drinks Starbucks and bitches about gas, for instance, can STFU in my humble opinion.

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