Fuel price hedging

[Dyad]

First time poster, been lurking for a year or so Great board!

Here is my story....

FIRE'd in 1999 from tech industry. Mid 40's. Bought a 48 foot
motor yacht, moved aboard with DW, and have been living aboard
ever since. Its a great life style, travelling from Canada to
Bahamas with the seasons. No plans (ever?) to move back ashore.
LBYM is taken as gospel among the full time cruising community.

Early after FIREing, I managed to get invested in 100% cash/bond
position, so survived the tech implosion OK. Just lucky, I think.
Back into equities around 2004.

Currently working with high 6 figure portfolio, diversified
pretty well. Some international and REIT exposure, been good
recently. 60% large cap equity. 20% cash. So far, so good.
SWR of 4%, inflation adjusted, seems to work for us. I sleep fine.

The fly in the ointment: Energy inflation.

Our particular lifestyle exposes us to oil price inflation in a way
which is more direct than land dwellers. We use around 6000 gallons
of diesel fuel per year. Do the math, and you see that this is the
single largest line item in our budget. And we know that oil
prices are generally on a ratchet up, outstripping the average CPI
by a good margin.

How to hedge oil price inflation? One way would be to buy a tank car
full of fuel, park it somewhere, and siphon off a few thousand
gallons occasionally. Not really practical, and probably not
legal, either.

Another way would be to load up on oil/gas equities, and ride the wave
with them. Notwithstanding the soft relationship between pump price
corporate profits, one can only go so far here without major loss of
sleep.

Any other ideas I missed? I'm sure major airlines hedge fuel prices
in some mega-corp magic way. Is something like this even accessible to
a retail customer in these quantities? What about major trucking
companies? Dunno...

Anyway, no panic yet, but a definite bump on my horizon.
Ideas appreciated.

[REWahoo]

Welcome Dyad. Based on the market moves you described, I'd say you were a "clean" market timer. Congratulations on 1) knowing when to sell and 2) having the nerve to get back in. Good luck on your next big market timing move.

Quote:

Originally Posted by Dyad Ideas appreciated.

Sailboat?

[Dyad]

Catamaran motor yacht. Custom aluminum construction. Trans-Atlantic capable, but this trip
is not currently in our plans. Someday, maybe.

[Patrick]

How about commodity futures? Buy a few contracts and if the price goes up, you make money on them to offset the increased price you pay at the pump.

[kramer]

Technically speaking, what energy futures hedge against (from your side of the table) is unexpected energy inflation. That is not energy inflation. If prices are expected to go up and they do, there is no reason to expect that you will make money on the future (beyond the return for the contract collateral which is often treasuries or TIPs). This is definitely worth something in your situation, I am just not sure if it handles your problem exactly as you would like.

My understanding is that energy spending is about 6% of US GDP, so you could calculate your overexposure.

Most ERs are overexposed to health care inflation, but that is hard to hedge against, too.

Kramer

[kramer]

Quote:

I'm sure major airlines hedge fuel prices in some mega-corp magic way.

My understanding is that these guys negotiate a constant price with their suppliers for the next X months based on current price expectations and write a contract. This gives them more surety about their costs so that they can properly set prices and avoid lumpy corporate earnings.

That is less of an issue for you, I believe -- you just don't want your lifestyle jeopradized in the future since you can't pass the costs on to your passengers -- a 12 month contract does not really solve this problem for you. So your situation would seem to be different, and harder to hedge against

Kramer

[Dyad]

Kramer

Thanks for the insight on expected vs unexpected inflation. I guess the "efficient market" knows
all about the expected inflation rate, certainly more than I would as a sideline consumer.

Regarding large fuel consumer contracts, I suspect that a rolling 12 month contract for fuel at
a fixed price to me would result in slightly lower lifetime costs, just enough to offset the supplier's
reduced risk in holding the inventory. Efficient markets, again....

Still, we see these types of contracts for home heating oil (very nearly the same physical thing as
diesel) in the northeast. They are written in the spring/summer, for the following winter. Sometimes
partially prepaid. Helps the supplier plan, and the homeowner sleep. I've never heard of anything
like this for engine diesel, though.

Still thinking......

[Olav23]

What about a commodity-linked ETF/ETN like USO/OIL or DJP? I would think a properly diversified portfolio would be the best hedge against inflation in general. Logically, higher gas prices = higher profits to gas companies = higher stock prices in the sector in your portfolio. I'd be willing to bet you have a large amount of ExxonMobil already.

[chinaco]

Your best hedge... Dump the motor Yacht and get a sailing Yacht. This will cut fuel consumption dramatically.

Obviously it is a change for the better... because sailing is much more fun!

But... If that does not seem to fit your need... You might need to attempt to project the inflation and set aside a fuel reserve fund. This will help you to better manage your lifestyle. You can hedge with investments.

But remember... It is never too late to learn to sail!

[rmark]

"How to hedge oil price inflation? One way would be to buy a tank car
full of fuel, park it somewhere, and siphon off a few thousand
gallons occasionally. "

I think I'd siphon the SUV parked next to me.

[ex_CFO_now_RVer]

When we purchased our first motorhome in 2003, we also put $100,000 into the Vanguard Energy mutual fund to hedge fuel prices. Performance has been very good.

2003 34%
2004 37%
2005 45%
2006 20%
2007 ytd 7%


BTW We also put $100,000 in the Health Care Fund when we retired in 2005.
Has not done as well the Energy Fund.
2005 8.5%
2006 12.5%
2007 ytd 8.2%

Dave