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Htown Harry · 12-05-2008, 11:17 PM

I saw an article last week that suggesting an individual could take advantage of the current cheap gas prices by buying an exchange traded fund that tracks gasoline futures. If gas prices go up, the fund value also goes up, covering the extra cost of buying the gasoline.

Locking in Low Gasoline Prices

The idea is nothing more than a commodity hedge transaction structured around family gasoline purchases. Buying futures has been around for centuries and the big boys at Megacorp do it all the time as a way to lock in their costs of production.

But A does not equal B in this case. While I am fairly confident that gas prices will be rising in the future, I know we are a low mileage family. This makes it somewhat improbable that we would be able to overcome the hit caused by high transaction fees. Nonetheless, I ran some 3-year numbers that were somewhat attractive.

I calculated that I would reach breakeven if gas prices rise to create a three-year average that is about 20% higher than today's price.

On the other hand, if prices are flat in 2009, rise by half in 2010 and rise a similar percentage in 2011, I could save about $1000 over the three years. If gas prices stay flat, my loss would be less than $500.

To be consistent with current financial practices, I didn't calculate a scenario where the price actually goes down.

To reduce uncertainty, I could spend hours developing a multi-page spreadsheet for every scenario, then ask the energy trader living next door to check my numbers. But it is so much more fun to toss out a fad money-saving idea to the ER Forum's financial experts.

Here's my envelope. YMMV....(Sorry. I couldn’t resist.)

Let’s say my family’s total miles are 250 per week, 1000 per month, 12k per year. (Assumes two weeks per year with no driving.)
Our vehicle gets 20 mpg, so our consumption is 12.5 gallons per week, 50 gallons per month, 600 gallons per year.
At $1.50 per gallon, our current expense is $18.75 per week, $75 per month, $900 per year.
If gas prices rise 50%, to $2.25, the annual cost will be $1200.
If gas prices rise to $3.50 the following year, the annual cost will be $2100.
If that’s what actually happens over the next three years, then my total expense will be the sum of those three numbers, or $4200.
But I want to hedge at today’s prices, or 3 x $900 = $2700, creating a nominal savings of $1500.
The actual savings will be reduced, however, by my loss of use of the money I prepay (the time value of money…) and by my transaction expenses.
Transaction cost: for the hedge to “work”, I’ll need to sell the hedge periodically. This could be as frequently as monthly, on the day when my credit card bill is paid. But I’ll pick quarterly to reduce my transaction costs.
My broker charges $10 a trade, so my transaction expenses over the 3-year period will be (3yrs x 4 sales/ yr. x $10 = $120 sales expense) + (my $10 initial purchase expense) = $130.
I’ll figure a 4% interest rate, which is about what a 3 yr. CD is paying. I will therefore be giving up about $350 in interest if I bought a $2700 3 yr. hedge instead of a 3-yr. CD.
So my total cost is $2700 + $130 commissions + $350 “lost” interest = $3180.
Comparing this to the $4200 cost of the fuel I will consume, I’ve saved $1020!
The savings are that good in large part because I’ve assumed there will be a big price jump. It may not actually rise that much, of course. And if prices stay flat or rise only modestly, I will lose money or break even on the hedge.
I can figure my breakeven point by finding where my expenses of $480 ($350 + $130) is offset by a like amount of price escalation.
This calculates out at $2700 + $480 = $3180. Dividing, I figure I will break if the price of gasoline rises such that the average price over the next three years is 17% more than today’s price (3180/2700).

I’ve ignored the fund’s management fee, but if it is 2% the breakeven calculation would only vary by about that same amount.

Are my numbers in the ballpark?

Any thoughts on the scheme in general?

12-05-2008, 11:17 PM	#1
Htown Harry Recycles dryer sheets Join Date: May 2007 Posts: 280	I saw an article last week that suggesting an individual could take advantage of the current cheap gas prices by buying an exchange traded fund that tracks gasoline futures. If gas prices go up, the fund value also goes up, covering the extra cost of buying the gasoline. Locking in Low Gasoline Prices The idea is nothing more than a commodity hedge transaction structured around family gasoline purchases. Buying futures has been around for centuries and the big boys at Megacorp do it all the time as a way to lock in their costs of production. But A does not equal B in this case. While I am fairly confident that gas prices will be rising in the future, I know we are a low mileage family. This makes it somewhat improbable that we would be able to overcome the hit caused by high transaction fees. Nonetheless, I ran some 3-year numbers that were somewhat attractive. I calculated that I would reach breakeven if gas prices rise to create a three-year average that is about 20% higher than today's price. On the other hand, if prices are flat in 2009, rise by half in 2010 and rise a similar percentage in 2011, I could save about $1000 over the three years. If gas prices stay flat, my loss would be less than $500. To be consistent with current financial practices, I didn't calculate a scenario where the price actually goes down. To reduce uncertainty, I could spend hours developing a multi-page spreadsheet for every scenario, then ask the energy trader living next door to check my numbers. But it is so much more fun to toss out a fad money-saving idea to the ER Forum's financial experts. Here's my envelope. YMMV....(Sorry. I couldn’t resist.) Let’s say my family’s total miles are 250 per week, 1000 per month, 12k per year. (Assumes two weeks per year with no driving.) Our vehicle gets 20 mpg, so our consumption is 12.5 gallons per week, 50 gallons per month, 600 gallons per year. At $1.50 per gallon, our current expense is $18.75 per week, $75 per month, $900 per year. If gas prices rise 50%, to $2.25, the annual cost will be $1200. If gas prices rise to $3.50 the following year, the annual cost will be $2100. If that’s what actually happens over the next three years, then my total expense will be the sum of those three numbers, or $4200. But I want to hedge at today’s prices, or 3 x $900 = $2700, creating a nominal savings of $1500. The actual savings will be reduced, however, by my loss of use of the money I prepay (the time value of money…) and by my transaction expenses. Transaction cost: for the hedge to “work”, I’ll need to sell the hedge periodically. This could be as frequently as monthly, on the day when my credit card bill is paid. But I’ll pick quarterly to reduce my transaction costs. My broker charges $10 a trade, so my transaction expenses over the 3-year period will be (3yrs x 4 sales/ yr. x $10 = $120 sales expense) + (my $10 initial purchase expense) = $130. I’ll figure a 4% interest rate, which is about what a 3 yr. CD is paying. I will therefore be giving up about $350 in interest if I bought a $2700 3 yr. hedge instead of a 3-yr. CD. So my total cost is $2700 + $130 commissions + $350 “lost” interest = $3180. Comparing this to the $4200 cost of the fuel I will consume, I’ve saved $1020! The savings are that good in large part because I’ve assumed there will be a big price jump. It may not actually rise that much, of course. And if prices stay flat or rise only modestly, I will lose money or break even on the hedge. I can figure my breakeven point by finding where my expenses of $480 ($350 + $130) is offset by a like amount of price escalation. This calculates out at $2700 + $480 = $3180. Dividing, I figure I will break if the price of gasoline rises such that the average price over the next three years is 17% more than today’s price (3180/2700). I’ve ignored the fund’s management fee, but if it is 2% the breakeven calculation would only vary by about that same amount. Are my numbers in the ballpark? Any thoughts on the scheme in general?