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Do gas stations hedge fuel costs?
Old 04-05-2005, 08:23 AM   #1
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Do gas stations hedge fuel costs?

Does anyone here know if gas stations use futures/options to hedge their gas purchases? I am thinking that anyone who deals in that kind of commodity volume would be hedging their risk...but then I see prices going from $1.80 to $2.25 in two weeks, which makes me think they're not hedged. Or, they're hedged but they're taking advantage of the media reports of rising gas prices in order to raise their own prices, so they get a double payoff.

Do they not incur the expense of hedging because they know that all gas stations in the area will be equally affected by increased prices and consumer demand for gas is pretty inelastic in the short-term?

I ask because I'm thinking of a business idea that would involve offering heding services to stations (if they don't already do it), truckers, or individual consumers...any thoughts?
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Re: Do gas stations hedge fuel costs?
Old 04-05-2005, 10:37 AM   #2
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Re: Do gas stations hedge fuel costs?

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I ask because I'm thinking of a business idea that would involve offering heding services to stations (if they don't already do it), truckers, or individual consumers...any thoughts?
I doubt your average gas-station owner thinks about hedges or futures as anything but growing greenery.

This idea makes me think of the Animal House cast waving to Otis in the wrong bar...
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Re: Do gas stations hedge fuel costs?
Old 04-05-2005, 12:08 PM   #3
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Re: Do gas stations hedge fuel costs?

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Re: Do gas stations hedge fuel costs?
Old 04-05-2005, 01:51 PM   #4
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Re: Do gas stations hedge fuel costs?

Our local gas station certainly takes advantage of increases. Not sure which station first raised our unleaded from 2.07 up to 2.19, but within an hour, they had all done so.

Had a station purchased gas at a price that gave them a nice margin at 2.07, this jump would certainly be profitable.

We actually had a little waiting line action at the last 2.07 station, Ah the 70's, tho doubt i could still push my car!
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Re: Do gas stations hedge fuel costs?
Old 04-05-2005, 02:12 PM   #5
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Re: Do gas stations hedge fuel costs?

That's what I'm trying to figure out...what if you could present them with a simplified plan, call it "insurance" where they pay a premium against gas prices going up. If gas prices rise, they get a check in the mail for some amount, so they could undercut their competitors (which could make sense, if more customers brings in more high-margin sales from their convenience store). If prices fall or remain the same, their premium goes unused (just like any other insurance policy).

You wouldn't have to explain the futures market or any of that to them, just keep it real simple to avoid confusing them.

Even better would be to market this to trucking companies where fuel is a large part of their variable costs. Do trucking companies think about hedging?

Marketing to consumers is probably a dead end, would require too much overhead per user...unless you could get a brand of gas station credit cards to offer it as an optional service, they could make money on the premium plus have added volume at their locations.

Am I barking up the wrong tree here?

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I doubt your average gas-station owner thinks about hedges or futures as anything but growing greenery.
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Re: Do gas stations hedge fuel costs?
Old 04-05-2005, 03:37 PM   #6
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Re: Do gas stations hedge fuel costs?

Trucking companies and any other industry with a large fleet have been hedging fuel prices for years. They try to anticipate whether the market is going up and down in the future, then look at what they are offered to lock in a certain price at that time. You either lock in a price for the future or take the chance and pay the market price at that time.

Same for propane and natural gas.
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Re: Do gas stations hedge fuel costs?
Old 04-05-2005, 04:12 PM   #7
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Re: Do gas stations hedge fuel costs?

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Am I barking up the wrong tree here?
Actually I don't think you are, much the same way that Fred Smith ignored guys like me when he founded FedEx.

I'm just not sure that the gas station owners are far enough removed from your average consumer to appreciate the wisdom of paying guys like you to insulate them from price swings. I just don't read about millionaires owning a chain of gas stations like McDonald's franchises.

I wonder who sells the gas to the gas stations, is it directly from the oil companies or through some other intermediary?

The big challenge would be growing large enough to profit from shaving a tenth of a cent off each gallon of gas when the retail gallon price is swinging by nickels or even dimes. It's similar to reinsurance. You've asked a very perceptive question but I have no idea how the research or analysis is done...
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Re: Do gas stations hedge fuel costs?
Old 04-05-2005, 04:40 PM   #8
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Re: Do gas stations hedge fuel costs?

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That's what I'm trying to figure out...what if you could present them with a simplified plan, call it "insurance" where they pay a premium against gas prices going up.
The problem is the demand they would get would exceed the supply.

Say they sell 50,000 gallons in an average month. They do the hedging, locking in a price where they could sell it at $2.05/gallon. The price in the area goes up to $2.25/gallon. They love the hedging! They sell the gas at $2.05/gallon, but wait a minute -- everyone is lining up at their station! They sell out in 3 days. Now they have to raise their prices again.

You can only realistically sell a commodity for a lower price than everyone else if your costs are lower overall. A one-shot deal can be used for an advertising gimmick, but that's it.

In my opinion. :)
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Re: Do gas stations hedge fuel costs?
Old 04-05-2005, 06:46 PM   #9
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Re: Do gas stations hedge fuel costs?

Let me modify your example - instead of keeping their price at the hedged $2.05, they raise the price to $2.15 while the unhedged gas stations move to $2.25. This way, they don't sell out of all their gas in 3 days, but they do get extra business at their station. Their profit on the gas stays the same ($2.15/gal plus $0.10/gal gain from hedge) PLUS some of the extra traffic in their station will buy those high-margin snacks and drinks, which is where most of the profit in a gas station comes from (that's what I've heard, anyway). And maybe their profit from gas goes up as well, if they can sell a few extra gallons at the intermediate price (assuming that there's enough excess capacity from the gas suppliers).

Quote:
Say they sell 50,000 gallons in an average month. *They do the hedging, locking in a price where they could sell it at $2.05/gallon. *The price in the area goes up to $2.25/gallon. *They love the hedging! *They sell the gas at $2.05/gallon, but wait a minute -- everyone is lining up at their station! *They sell out in 3 days. *Now they have to raise their prices again.
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Re: Do gas stations hedge fuel costs?
Old 04-05-2005, 09:11 PM   #10
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Re: Do gas stations hedge fuel costs?

If the store is a major brand (like Shell, BP, Mobil, etc) they have to to buy their gasoline from their supplier. They can not hedge.

A large "unbranded" chain, like Quik Trip, Kwik Trip, Sheetz, Wawa, etc. probably does some hedging, they have traders that do that for them.

Also, when the price of gas is going up the price of supply increases before the prices on the street move. So the retailer is typically making a very small margin if prices are moving up because he is squeezed. Nobody wants to raise their street price and chase away customers.

It's a very tough business and there is little margin in gasoline. *The only time the retail business makes money is when prices start to move down, because again the price of supply moves down before the street price. *However, on the downward cycle the street usually moves down quicker as everyone is trying to capture volume when they are making money. *

Also, your hedging example assumes that they always get it right, ie they buy low and sell high. The market is so volatile that that is not easy to do.
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Re: Do gas stations hedge fuel costs?
Old 04-06-2005, 03:33 AM   #11
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Re: Do gas stations hedge fuel costs?

Soup
The experience I have is that the retail outlets that are retail outlets alone do not hedge. They have supply contracts with wholesalers and may also buy on the spot market, but do not buy on the futures market.
The wholesalers are a little bit different and may or may not hedge, although this is not a big part of their business as they are able to, and do, pass price increases along to the retailers.

Let us know when the idea comes to frutition.
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