One Man’s Whack At Hedging Fuel Costs
Doug Miller, at the Beyond Right Field blog thinks oil prices are going back up, and he has a plan to deal with that.
We can tell right off that he’s definitely a numbers kind of guy. First he figured out how many gal. of gas the family uses each month (company cars, but a boat with a tank 10X larger than our personal car). Approx. 160 gal/mo is the national ave. for the standard family with 2.3 kids.
Miller has decided he could possibly trade the ETF for crude oil prices, USO, as a hedge for his personal gas use.
At 160 gallons a month at $1.50 per gallon that figures out to be in round figures $2,900 for the average family for a years worth of gasoline at today’s prices. So, what do you do? You go to your brokerage account and you buy $2,900 worth of USO, then every month you sell 1/12th of your holdings to pay for that months gas. If gasoline goes up, so should USO and that increase should cover the difference in what you are paying at the pump. Beware, you will have short term capitol gains tax consequences and brokerage fees to account for, an could increase your holdings in USO to help hedge some of that, but if oil does go to $100 a barrel again, I think the last thing you will be worried about is paying $6 a month brokerage fees. Also beware, oil could go lower. It wasn’t that many years ago that crude was trading for $10 a barrel, and we could very likely be headed in that direction again. If that is the case, you could actually lose money, possibly your whole investment if USO goes to zero as the ETF doesn’t track oil dollar for dollar. There is also some risk of time erosion with USO as there is a contango in the oil market right now.
He hasn’t stepped up to the plate yet. Looks like one of those “Do Not Attempt This At Home” kind of things to us.
January 5th, 2009 at 8:22 pm
Can you explain why you think it’s a bad idea? I think for the average family the risk reward is better than most investment vehicles.
And a whole lot cheaper than paying for a hedging service such as your own. Plus, if there is an emergency that required me to need the funds, I can liquidate the position.
If oil climbs up to $140 and then starts to fall off a cliff again, I can liquidate the position and actually make a profit, bringing my fuel costs even lower, and depending upon entry and exit points, could even pay for most of my fuel costs for the year.
I just don’t see the downside other than oil dropping to $10 a barrel, and as we have seen in the last few days, it doesn’t appear that is going to happen anytime soon.
January 12th, 2009 at 7:05 pm
Doug — Many of our programs have no upfront cost and very low margins, but only for businesses. We actually do not have a service for individuals, mostly due to CFTC restrictions, but we have considered some alternatives. I think your idea is a reasonable hedge, but there are some problems. There is basis risk. You are using oil instead of gasoline and also have to consider whether USO is a good proxy for oil. As PumpGirl noted, there is also the risk in using end-of-month pricing. It would be better to have an average price over the course of the month. Finally, the plan requires pre-payment of the entire year’s fuel cost — or longer if you chose that.
If we did not think the idea was interesting, and had merit, we would not have written about it! For families with a couple of SUV’s, it is a reasonable approach.
And thanks for your comment.
Jeff