NorCalSavant

In concert with the recessing economy, the price of oil at the pump has come down drastically. It sure feels great to be paying $1.80 a gallon compared to $4.50 a gallon from just a few months ago. I want these cheaper oil prices to last for a long time, but we know otherwise. Sooner or later the global economy would start roaring again boosting demand and price of oil.

It is practically impossible to physically hoard oil at today’s prices for use tomorrow. However, there are a couple of ways to hedge against a rise in price of gas.

Oil-tracking Funds

One way is to buy a domestic oil-tracking fund like USO. USO or United States Oil Fund, LP, an Exchange Traded Fund, seeks to reflect the performance, less expenses, of the spot price of West Texas Intermediate (WTI) light, sweet crude oil delivered to Cushing, Oklahoma. So in theory, you buy USO today for a dollar amount equal to the cost of gallons of gas you would use for the entire year at today’s cheap prices. Later when the gas prices are high, you sell USO. The profit from the sale should offset the higher prices you have paid for at the pump.

But wait, there is a problem with the details. It is very difficult to know when exactly to sell the USO stock. If you settle upon a date, say one year later, the price on that day may not be the same as the average of higher prices you have been paying during the year. Worse, both the gas and USO prices could stay higher all through the year but drop down to your initial price or an even lower price at the time of the sale date. If you decide not to go with a fixed date, it is almost impossible to decide precisely when to sell. The peak price only gets identified after the prices have fallen back down.

Even if, fortuitously, the timing was perfect and the price at sale time was the same as the average between the purchase and sale, you still have to pay taxes on capital gains from the sale besides the commissions on the purchase and sale of USO. You have to invest money up front and incur the opportunity cost of giving up interest or other returns from that money.

Another strategy is to use prepaid gas cards or a fuel cost protection program like Petrofix.

Prepaid Gas Card Services

I found two potential prepaid gas card services – MyGallons.com and GasBankUSA. As the name suggests, the idea is you prepay today at today’s price for gas you would use in future. Sounds good, but they are not operational yet. Both the services say they are working on going live in the near future.

Petrofix

Petrofix is a fuel cost protection program. It is operational right now. You can purchase a plan from them for your geographic area. A plan extends for a certain duration ranging from three months to two years and allows you to lock in the current price for a fixed number of gallons per month for the duration of the plan. The prices are based on weekly statistics for the geographic area published by the Department of Energy’s Information Administration (EIA). You can purchase gas at any pump. You can actually use a web site like gasbuddy.com to search for the cheapest gas station in your neighborhood to fill your tank. If the published gas price rises above your locked in price, Petrofix pays you the difference between gas price and the locked in price.

Their current price for the 12 Month Plan for West Coast is $0.31 per gallon. The current price of gas is $2.02 for the West Coast. If the gas prices go above $2.02, Petrofix pays you the difference. Of course, if the gas price falls below $2.02, you do not get any payback from Petrofix although you are able to fill your tank at the cheaper price.

Including the price of the Plan, you are actually effectively locking the price at $2.33. You will not pay a price higher than that for gas for the duration of the Plan, no matter how high the price of gas goes. On the flipside, you will pay less than $2.33 if the price of gas falls below $2.02 but it will always be $0.31 more than the price at the pump.

Consider the hypothetical scenarios in the table below. You never pay an effective price more than $2.33. You can pay less though when the gas prices are below $2.02. The table reflects net savings or loss per gallon and per month for different gas prices at the pump assuming signing up for hundred gallons of gas per month. In the real world, the actual annual savings/loss will depend upon actual gas price movement during the duration of the Plan.

One good thing about Petrofix hedging is that you only pay the plan cost up front, not the entire cost of gas you will consume for the next year like you do with gas cards or if you buy an oil-tracking fund. That way, you don’t have to pay upfront what you would have paid incrementally over the year for gas.

In the Plan above, you are essentially paying extra $0.31 or about 15% over the current price of $2.02 to hedge against price rise for the next year. Looking at the historic gas prices in the chart above, gas prices seem to go up at least 50% from a trough to a peak in a year. Given that, the Petrofix Plan above appears to be a good bargain assuming of course that the prices are near a trough. What do you think?

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