Friday, July 11, 2008

How to short oil on a one-way bet -- lease a SUV.

A number of people on various blogs have been wondering whether today's oil prices are a bubble, and making comments like: "If I was brave I'd short oil ... If there was an easy, low-cost, safe way, I'd short oil..."

Well there is. Lease a new SUV. Short oil while riding in the lap of big-wheeled luxury. Making a one-way bet.

An SUV? Today??

Sure. Thanks to the explosion of the price of gasoline, the price of SUVs has plunged. That lower price compensates for the higher price-of-gasoline operating cost -- that's how markets work.

In short, you can buy a heck of a lot of gasoline with a multi-thousand dollar price discount. And you can't enjoy that big-wheeled luxury in any other kind of car. Meanwhile, the price of Mini Coopers and such is rocketing up (and you have to pay extra for premium gas in a Mini).

The people who are getting killed owning SUVs are those who bought them 18 months ago -- not only are they paying double for gas after paying top price for the vehicle but their vehicles are plunging in resale value, which is likely to cost them even more than the extra gas cost.

But that's them -- if you are getting your new SUV today, that plunge in SUV market value is good for you.

Now when you get your new SUV you lease it. First, this further reduces the cash acquisition cost, compared to the financing payments if you purchase. Lease payments are smaller than loan payments. (Be sure to haggle the lease payment down -- SUVs are very haggleable these days.) But more to our point, if you lease a SUV and ...

[] The price of gas goes up further, "peak oil"-like, you are protected from any loss of the SUV's value -- it falls on the leasing company.

[] The gas price starts falling, "burst bubble"-like, then the value of SUVs will surge up again -- and your purchase option at the end of the lease term may turn out to be a nifty bargain that gives you a very nice profit when exercised.

And that's how to short oil while riding in big-wheeled luxury enjoying a one-way bet.

How much fun is that? Compared to trying to pry yourself in and out of your Mini Cooper ... that you paid a big premium for ... three years from now when the price of gas is $1.90 ... and your Mini's value has plunged ... so you can't sell it because you still owe more on the loan than the car is worth ... while you still have to pay extra for premium gas to run it.