I own stock in Exxon and Chevron

People tell me I should feel guilty about owning stocks in Big Oil.

I don't. 

Stocks in companies that find, extract, refine, and sell petroleum products are a pretty good inflation hedge. They also have a good dividend. I own them and feel good about it.

Harvard divests from fossil fuels

The Harvard faculty voted a resolution to divest. Alumni voted pro-divestment candidates onto its Board of Overseers. The pressure was immense. Harvard is divesting from fossil fuels. 

I am not. Harvard is blaming the wrong target. They heat their buildings, thank goodness. It gets cold there. Harvard should look in a mirror.

Yes, fossil fuels are putting greenhouse gases into the atmosphere and I agree it is dangerous for the planet. Humans repeatedly change the environment with unintended bad consequences. We destroyed a cod fishery by overfishing; we destroyed salmon runs by killing beavers and building dams; we nearly killed off the bison; and we succeeded in killing off passenger pigeons. The earth is a big place but we are changing it and we don't know the implications.

Miami and Miami Beach flood zones in maroon. 

A change from fossil fuels won't be made by people selling Exxon. It will happen when people find alternative fuels to be more convenient and less expensive. We humans create the demand. Harvard uses oil. I use oil. Every reader of this blog uses oil.  

Want to save the planet? Use less fossil fuel. Support development of alternative fuels. Support taxes on fossil fuels to compensate for its externalities. If you own oil stocks, vote proxies urging the company to diversify into hydrogen and other technologies.

Investment advice. Feels like old times. I studied investments and gave investment advice for 30 years, I have been retired for six years. I might be wrong. Unexpected stuff happens. You could lose money doing anything, including nothing 

1. In the long run owning a diversified stock portfolio is an inflation hedge because as inflation raises nominal prices, those prices are reflected in the higher nominal earnings. Those earnings are eventually reflected in higher stock values. The problem is that in the short run--maybe years or decades--stock prices dance to their own drummer. They might be totally disconnected from the overall price level. Moreover, inflation likely means that the Federal Reserve will raise interest rates, which traditionally risks a decline in stock prices. The result is a double whammy, not a hedge.

2. Refined oil is both a consumer item and an input into the manufacture and transport of nearly everything. The price of oil in the U.S. should generally reflect the cost of production of new oil to replace the oil that was consumed the day prior. There is enough competition in the industry that the price of oil reflects a market, not an artificial, rigged price. That means the price of oil generally eventually reflects the real-world costs of oil leases, oilfield employees, refining costs, capital costs, marketing costs--everything. The goal is to have an investment thoroughly linked to the real world, with a product that is ubiquitous and essential. Such a product might track inflation. It usually does. See "Energy" there in the upper right of this chart. 

Hartford Funds

3. Oil companies are a "mature" industry. Some people would say it is a dying, dinosaur industry. Why own it when the future is elsewhere? I consider Big Oil's maturity to be a benefit. Mature companies pay dividends (Exxon 4.7%; Chevron 4.4%) because they are rewarding their owners in the here and now, not reinvesting profits toward some open-ended future. The dividend means that they are less likely to be repriced downward by the Fed raising interest rates to deal with inflation. (When interest rates go up, investors discount future potential cash flows at a higher rate, driving down the current price. Companies with dividends in the here and now are less affected.)  

4. Warning. Things can go wrong. When market sentiment changes nearly everything can go down, even oil stocks. Oil stocks have their own potential problems. Oil is a world commodity and it is transportable. Therefore, what happens with prices in the USA is important, but not determinative. There are other oil producing countries with the power to set volumes and prices, especially Saudi Arabia. Saudi Arabia can produce oil for next to nothing. They could flood the world with cheap oil for a few years to try to put U.S. production out of business--or at least to send us some blunt message about our relations with Israel. They probably won't do it. It isn't in their economic interest. But they could. Bottom line, the thing that makes oil a good inflation hedge--its centrality in world commerce and the price of everything--makes it a potential weapon. There are no perfect hedges. There are no perfect investments.

Advice for readers: If you want to do something to reduce carbon emissions, install solar power on your house. Don't sell your current vehicle to someone else. They would continue to use fossil fuels. Destroy it. Replace it with an electric one, especially if your electricity comes from solar from your roof. Vote for higher taxes on fossil fuels. Get the money to do all this from your dividends on oil company stocks. It isn't hypocritical and it would do some good.