Lock in Low Gas Prices

Oil has declined nearly 66% from its peak closing price of $145.29 on July 3rd to its closing low of $49.62 on November 20th. With gas prices down significantly since then, drivers no longer dread filling up at the pumps like they did just a couple of months ago.

We recently came across a good article highlighting a simple way to lock in low gas prices. The US Gasoline Fund (UGA) is an ETF that tracks the price of gasoline futures in the US. If you want to go to the pump and not even care what gas prices are, you can buy the same dollar amount of UGA that you would normally spend on gas each year based on the current price of gas. If gas prices go up and you're paying more at the pump, your UGA will also be going up by a similar amount. If gas prices go down, your UGA will also go down, but you'll be paying less at the pump as well.

click to enlarge

Comments

[SW Richmond:]

Already playing a somewhat riskier game here, on the same reasoning, routinely buying small batches of DXO. The only way oil continues down is if reflation fails completely and the central banks stop trying, just short of currency destruction. I consider that a low-probability outcome.

2008 Nov 28 02:37 PM

[Larylar:]

This plan does not work for the following reason: if you buy UGA now, and gas at the pump goes up and then back down without you selling at the top, your UGA will not be worth more than what you paid, but you will have paid more at the pump.

2008 Nov 28 05:02 PM

[raising4dau...:]

Larylar is right. In order to work properly, one must use/spend some of the gains in UGA to offset any rise in gas prices.

2008 Nov 28 08:28 PM

[ValueSeeker:]

On top of Larylar's and raising4daughters' posts, even if you sold at the top you still have to pay the tax on the gain, so you can never come out even.

2008 Nov 28 08:55 PM

[mn33:]

moral of the story: watch out for little tiddly wink "investor groups"

2008 Nov 29 01:18 AM

[Soham Das:]

I guess we should take essence from the post and not really follow it blindly.The essence is we can use UGA for hedging. Or better if its an oil future.It can be modelled as a bond mathematically.

The details of investment will have to checked out.

2008 Nov 29 03:03 AM

[Jason Leavitt:]

This is a bad idea. UGA doesn't have any volume.

2008 Nov 29 08:52 AM

[The Whole P...:]

Over the last 30 years, gasoline has not gone up much more than inflation. In fact, it usually lags inflation. Perhaps that will change in the future, but at this point, investing in TIPS would do just as well in the long run.

Once we add future taxes and carbon trading to the mix, gas prices at the pump will likely go up much more than the actual price of gas or oil. I assume that investing in UGA will not help offset these extra expenses. Meanwhile, these extra expenses will likely reduce demand, thereby reducing the underlying prices of gas and oil. In this scenario, hedging with UGA could result in an investment loss while still paying more at the pump.

2008 Nov 29 09:12 AM

[axelrod608:]

Better, buy HTE. Currently trading in the low $10's, it pays dividends monthly of .24/share, around a 30% yield. Yes, you gotta pay tax, but hey, where else you gonna get 30% ??

2008 Nov 29 09:48 AM

[Paul Killinger:]

So hedging is alot more difficult than it looks. No kidding. But it would have been alright if the Ivy League "geniuses" on the Street hadn't figured out how to leverage it 32-40X. As JR would have said, now we're all paying the price.

And they're not the only cause of this meltdown. The people we elect to Congress have compounded it beyond comprehension with the myriad of laws, regs, and mandates they've adopted that no one including their fleets of bureaucrats, attorneys and accountants can understand.

2008 Nov 29 10:07 AM

[Paul Killinger:]

Now we're asking the same people who created it to save us from Government Gone Wild. I think there's a word for that....

2008 Nov 29 10:12 AM

[Paul Killinger:]

As one of the commentators on CNBC recently opined, Washington is populated by two groups of folks, Wolves and Fools. God help us!

2008 Nov 29 10:14 AM

[Groundhog:]

The reason oil and it's fuel products fluctuate so outrageously in price is that oil is the only commodity that doesn't trade on a "free market." So while our politicians have been drumming free market economics into "joe six-packs" ears since the Nixon administration, they've been sucking up to OPEC and their Saudi overlords. Now is our chance to break the back of OPEC. Let's do it. Let's tell OPEC to put their anti-free market cartel where their sun don't shine.

2008 Nov 29 10:20 AM

[Paul Killinger:]

And that precisely sums up the DISCONNECT between our Capitol and Main Street. We're still looking for Mr. Smiths to send to Wahington. Sad to say he doesn't live here anymore.

2008 Nov 29 10:23 AM

[Paul Killinger:]

Okay, Groundhog, let's say we'd all like to do that. Short of our all riding bikes to work, exactly how would we go about it? That's not only the trillion dollar question, but the answer will delineate our future way of life on this planet.

2008 Nov 29 10:29 AM

[cocomurph:]

If the quality of your "investment" advice is comparable to the quality/depth of this article, then you'd best be looking for employment elsewhere...soon!

2008 Nov 29 10:44 AM

[Groundhog:]

Trade negotiations, PaulK8756. In our bid to dismantle OPEC, the United States will offer to discontinue agricultural subsitdies to its farmers while gaining the support of the African and South American agricultural interests. The argument being affordable food stuffs for all in the long run and market driven fossil fuel prices. This will give the developed and developing world a level playing field on which they both can implement more energy efficient economies. In short, the American way for everyone...and they'll like it. By the way wise guy, I think everyone riding bicycles to work is an excellent idea. Your SUV makes you look fat.

2008 Nov 29 10:55 AM

[CLH:]

groundhog---You of course are wrong. Oil is in a free market. OPEC has nothing to do with anything. Does OPEC want oil at $50? No but there is nothing they can do about it because the market drives the price not the phony monopoly OPEC.

2008 Nov 29 11:16 AM

[NOWHEREMAN:]

The amount of oil on the supply vs the demand side delineates the price of oil. If supply is less than demand oil will go up Period.

Today, there is less demand. Tommorow will be decided by the oil producers not the end users. Unless the world goes into a permanent Depression, that is. IMHO

2008 Nov 29 11:30 AM

[jt:]

Yep...INSANITY!!! That's what Einstein defined as doing the same thing the same way over and over and expecting a different outcome. The problem is that TPTB behind all this...the banksters and their intl masters...are NOT insane. They knew this would be the outcome. Their goal is different and has never changed--global govt with them as global bankers. The sovereignty of the US and its military stand in their way...but they're well on their way to overcoming that as they've basically destroyed the economy and the Constitutional underpinnings of this country.

And with the wimps and bought off politicians we now have (with rare exceptions like Ron Paul of Texas), along with the flat out congressional socialists (who would be called by their more accurate title of Marxists were they outside the US) who's to stop them? Certainly not Barack and his coming Obamination of a Presidency. His planned policies will only add MORE fuel to the bonfire and remove more of our Constitutional rights to prosper thru hard work. I love this cartoon from a week or so ago...you might have seen it. It's a from the Wizard of Id series, if I can copy it here:

caseyresearch.com/dIma...




On Nov 29 10:12 AM paulk8756 wrote:

> Now we're asking the same people who created it to save us from Government
> Gone Wild. I think there's a word for that....

2008 Nov 29 12:50 PM

[jt:]

OK...so it won't take complete links...try piecing these together:

caseyresearch. com/dImage.php?i= 1227373226-id.jpg

or if that doesn't work--

caseyresearch.
com/dImage.php?i=
1227373226-id.jpg

2008 Nov 29 12:53 PM

[billouisville:]

Historical charts indicate O&G and energy peaks by July bottoms Oct-Nov.
ergo this ETF would produce $37 sh. profit by July. Assuming you spent $50. a week ($2600. yr) divided by the $37. you would need to buy 70 shares @ current price. (23) Cash out early July and have the cash for an entire year of fuel. Your total investment would be 70 sh x $37. profit equals a years worth of fuel in only 7 months.

2008 Nov 29 01:07 PM

[Paul Killinger:]

Bill,

I like your idea and the numbers work. But the only ones who really do that are the professional hedgers (because they have to).

The rest of us cross our fingers. As we've witnessed over an extended period of time now, that's working less and less well.

2008 Nov 29 01:56 PM

[Groundhog:]

What part of the definition of the word "cartel" don't you guys understand?

2008 Nov 29 02:04 PM

[Paul Killinger:]

Hog,

And, no, I don't drive an SUV. Wouldn't own one.

But that's not because I have anything against our energy producers. I admire them actually.

Indeed, without them we'd be writing these missives in longhand on sheepskins by candlelight and forwarding them to one another via the pony express.

2008 Nov 29 02:05 PM

[Paul Killinger:]

P.S. And in case you labor under the illusion that's somehow quaint or romantic, pull the plug on the electricity in your house for a couple of days and then tell me about it.

2008 Nov 29 02:07 PM

[Paul Killinger:]

Speaking of which, it looks like we're lucky our Prez to be is inheriting such a bum economy. Maybe this will forestall some of his zanier ideas like doubling our electric rates in the name of global warming. (Actually, I'm a bit more worried about this proposed Civilian Security Force myself.)

2008 Nov 29 02:12 PM

[Groundhog:]

I give up. It's your world. I'm just living in it. Thanks for the advice. See ya later alligator.

2008 Nov 29 02:12 PM

[Paul Killinger:]

By the way, the only person who's come up with a REAL solution to defang OPEC is ol' Boone. If the new Prez gets behind that, he'll be my man for all seasons. (See, and I didn't even choke when I said that.)

2008 Nov 29 02:17 PM

[Kelly Liebe...:]

Interesting Holiday weekend to say the least. Mumbai is an inkling of what's to come worldwide. No one in the International Intelligence aparatus saw this coming, just as most of the Economic Intelligence aparatus missed the downfall of the global financial economy...
Anybody wonder what is next?
As some of us keep saying, be prepared. Now.

2008 Nov 29 02:18 PM

[Paul Killinger:]

No, Hog, don't go away. Learn something instead. I learn things all the time in this medium. That's how I discovered the U.S. has inexhaustible supplies of natural gas and gas hydrates. They'll power our economy without OPEC virtually forever.

2008 Nov 29 02:22 PM

[Paul Killinger:]

You're ABSOLUTELY correct, Kelly. We all need to learn how to take better care and be more responsible for ourselves. Figuring out how not to be net debtors as individuals would be good for a start. (Funny, but that's something all previous generations of Americans took for granted.)

2008 Nov 29 02:28 PM

[bill d:]

Also depends on the price of gas. In CA we pay more than in MO - I assume UGA price is the same everywhere.
I know, I know - all us rich bastards in CA should pay more - at least we used to be (rich not bastards). I'll just keep my Canroys and a bunch of long calls way out there.

2008 Nov 29 06:43 PM

[DeanD:]

In theory you would reset your position in UGA every me you filled your tank. Of course that would not be cost prudent.


On Nov 28 05:02 PM Larylar wrote:

> This plan does not work for the following reason: if you buy UGA
> now, and gas at the pump goes up and then back down without you selling
> at the top, your UGA will not be worth more than what you paid, but
> you will have paid more at the pump.

2008 Nov 29 08:05 PM

[granger:]

I know of a financial planner that has used a twist on this for decades. He has his clients invest in their local utility over time using Dollar Cost Averaging (if it has a DRIP or he will have them select one they understand ala DUK or Edison), till they have enough saved where the dividend each year covers their typical 12 months of gas/electric expenses.

His clients love it. He has also started a similar strategy with people and their cable/phone bills but that is a recent creation of his sons.

2008 Nov 30 07:47 AM

[DollarTalkNet:]

This article is really just a shameless plug for UGA. Okay idea. Poor execution. The fund was just formed this year, so the theory has hardly been tested, which is another point that was not mentioned, on top of all the other problems with the idea mentioned before this one.

2008 Nov 30 05:40 PM

[daniel3582:]

This isn't a true hedge. Capital gains taxes will take a huge chunk of your profits. Other's have mentioned this, but I want to reiterate it.

2008 Nov 30 06:16 PM