How to Hedge Against Rising Gasoline and Heating Oil Prices

by Ben on March 3, 2015

If youre like most people, youre enjoying the benefits of paying less at the pump for a gallon of gas. If you live in a northern state (like me) youre probably also very happy that it is a lot cheaper to fill up your heating oil tank too !

Most experts agree that oil and gas prices wont stay this low forever and there is a good possibility that prices will start rising again sooner than later.

Why will oil prices rise you ask? As more and more oil rigs are shut down there is a growing perception (right or wrong) that new oil production will start to fall and the current over supply of oil on the market will reverse course.

But dont despair! There actually is a way you can lock in these relatively cheap oil and gasoline prices now even if prices double or triple down the road. Heres how to do!

Heres how to hedge against to threat of rising gasoline prices:

Lets say youre happy with the current gasoline price of $3.00 per gallon (much less in most areas) but feared the price might rise over the next year (which is a very real possibility).

Estimate the amount of gasoline you expect your household to use over the next year, for our example lets say this was 1,000 gallons.

Multiply that 1,000 gallons by the current price of gas to get your hedge amount, for our example this will be $3,000 or $3.00 per gallon times 1,000 gallons.

Then, purchase $3,000 of the United States Gasoline Fund ETF  (ticker symbol: UGA ) through a discount brokerage firm. Although this may sound super risky and complicated, purchasing shares of Electronically Traded Funds (ETFs)like the UGA is just as easy as buying shares of individual stocks. You can buy them through any online discount broker such as TD Ameritrade, Charles Schwab, or Scott Trade. Just dont get carried away with day trading  like I did during the Internet bubble.

OK, so that seems relatively easy enough, but youre probably still asking yourself how this technique actually locks in the price of gasoline for your for 1,000 gallons of gasoline over the next year. Fortunately, Ive created the following Excel chart to show you how this works:

In scenario 1. we assume that we follow my plan above and by the end of the year the average price you have paid for the years gasoline is $4.35. The total cost of gasoline over this time would be $4,350 (Ouch), but, your investment in the ETF Gasoline fund would also rise by roughly* the same percentage as the price of gasoline you paid (compared to your $3.00 per gallon target price). Therefore you would have gained $1,350 in your investment value bringing your total net cost for gasoline to $3,000 (or $3.00 per gallon).

In scenario 2. the average price of gasoline remains constant throughout the year and therefore averages the target price of $3.00. Your investment in the gasoline ETF also remains unchanged so there is no profit or loss.

In Scenario 3. the average price of gasoline in the following year drops to $2.25. Although you only pay $2,250 for the same 1,000 of gasoline, you lose $750 in your gasoline ETF investment thus bringing you back to your original target price per gallon of gas at $3.00 per gallon.

While investing in the United States Gasoline Fund ETF is not a perfect hedge against fluctuating gasoline prices (gasoline prices can vary quite a bit by region), it should provide reasonable protection in helping you reach your target price per gallon of gas of $3.00 or whatever the current price of gasoline is that you want to lock in).

Not only can you use this strategy for protecting yourself against rising gasoline prices, you can use a similar strategy in protecting yourself against rising heating oil prices and other commodities as well.

Some potential drawbacks of this strategy.

The first drawback of this strategy is the cost of executing the ETF trade through a discount brokerage account. However, most online discount brokerages will allow you to make this trade (both the buy and the sell) for under $10.

The second drawback of this strategy is the loss in the time value of money. Simply stated, you are losing out on investing the $3,000 in some other financial product such as a savings account, certificate of deposit, or mutual fund.

* The UGA is not a 100% accurate hedge against the price of gasoline. There will always be some fluctuations in the volatility of gas price vs. the volatility of the UGA price although the comparisons should be reasonable for the intent of this example.

THANKS for reading my personal finance blog. You can learn more about my site here or you can jump right into the juicy stuff by reading my familys own detailed debt free success story (which has formed the foundation of this site). Please consider signing up for my free email updates !

Delta Airlines VIP Porsche Cayenne Shuttle Service

by Ben on January 22, 2015

I had just boarded my Delta flight home in Atlanta, GA bound for Portland, ME when I notice a very peculiar site out my window. There on the tarmac was a brand new white Porsche Cayenne parked right next to the jet-bridge stairs.

At first I thought it might have been a private vehicle that had worked out some deal with the airport to pick up a high level corporate executive or celebrity, but when the vehicle drove off there was a subtle Delta sticker on the back window.

Hmmthat didnt seem like a very cost effective vehicle for supporting aircraft operations., I thought to myself.

Apparently, this Porsche Cayenne is a secret new customer service product Delta is offering for high level frequent flyers (Diamond Medallion).  The driver of the Porsche will meet arriving aircraft at the jet bridge and redirect select passenger(s) down the service stairway to the parked SUV below.

From there the passenger(s) will be whisked away to the nearest Delta Sky Lounge or directly to the next gate for VIPs with tight connections.

The service is not advertised but it is already getting lots of free exposure in the news thanks to word of mouth.

Pretty cool frequent flyer perk if you ask me, now if only theyll extend the service for bums like me!

THANKS for reading my personal finance blog. You can learn more about my site here or you can jump right into the juicy stuff by reading my familys own detailed debt free success story (which has formed the foundation of this site). Please consider signing up for my free email updates !