You, Too, Can Hedge Fuel Prices!

from the farm-to-market dept

Wed, May 23rd 2007 8:03pm — Joseph Weisenthal

A new startup is trying to cash in on the pervasive belief that gas prices are on an inexorable upward climb. The company, PriceLock, will allow consumers to buy gasoline in advance, locking in today's gas prices for up to two months. In other words, the company will let drivers hedge their fuel prices the way airlines do with jet fuel -- sort of. The difference is that airlines don't lock in prices by buying up fuel way in advance. Instead they buy contracts that allow them the option to purchase fuel at a given prices at some date in the future. If the price of jet fuel has actually dipped, they're not compelled to buy it at the price they locked it in at. In this case, drivers are only protected against an upswing; if the price of gas falls over the next two months, then they'd appear to be out of luck, having already bought gas in advance at a higher price. Really, this kind of business only works during periods of time when gasoline prices are moving relentlessly higher (as they are now). Under normal conditions, nobody is going to buy gas in advance or attempt to anticipate market swings. Offering consumers a way to hedge their exposure to higher gas prices isn't a bad idea (though this could probably be accomplished satisfactorily simply by buying the stocks of oil companies), but this system isn't likely to work.

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33 Comments

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Shun, 23 May 2007 @ 8:50pm

Is this a scam?
Is this like one of those gold bug sites which promise to sell you ounces of gold, and in reality, they sell you a worthless piece of paper?

Seems too good to be true (or too many people would be clueless about it for it to really take off).
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Marcster, 23 May 2007 @ 9:18pm

Priceline.com did this already...
I did this with priceline.com years ago. They offered the same type of deal based on their bid for travel pricing. After a few months, they dropped the service...
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Anonymous Coward, 23 May 2007 @ 9:27pm

You can also hedge with new ETF's
Robert Shiller of Yale has teamed up with an investment house to let you also buy "Upcrude" (UCR) or "Downcrude" (DCR) ETFs depending upon your speculation on whether the price of crude oil is going to go up or down. It's interesting to see the democratization of the formerly arcane futures and commodiaties markets for us wee-folk.
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Anonymous Coward, 23 May 2007 @ 9:56pm

There is a company in Montana or Michigan or some other M state that has been doing this for years. Last summer I read about someone who bought 10,000 gallons at under $1 a gallon in the mid 90s and he uses that gas today. They didn't have 2 month restrictions either.
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BlackWidow, 23 May 2007 @ 10:37pm

If it's too good to be true....
I did this with priceline too and while I saved quite a bit on gas at the time, it was limited to co-op type gas stations in my area and most were in out of the way places for me to go.

You know what they say about if it's too good to be true!

It would be great without the 2 month limit..that way if the price drops you can just pay at the pump and if it goes back up you could use your discounted purchase...but of course they would put a limit on it.
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Anonymous Coward, 24 May 2007 @ 1:17am

Just a forward contract....
The concept of fixing the price today of a transaction in the future is very common in the world of finance and business, and it typically is used to reduce unknowns, not risk.

For accounting reasons a company (or individual) may need to precisely budget future expenses and prefers to lock in the price now. By doing so, the transaction goes from being a risk of the price going up, to a risk of the price going down.

In any event, aside from the gimmick aspect of this business, I doubt that many consumers have a real need or desire to accurately forecast their gas expenses.

Wikipedia has a decent article that explains how all this works. http://en.wikipedia.org/wiki/Forward_contract
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Shohat, 24 May 2007 @ 2:24am

Just shows you how clueless bloggers are
..."to hedge their exposure to higher gas prices isn't a bad idea (though this could probably be accomplished satisfactorily simply by buying the stocks of oil companies)"
Gas prices up = oil companies stock up ?!?!?!

If it wasn't for Google's idiotic blog fetish, nobody would have to read this nonsense...
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claire rand, 24 May 2007 @ 2:30am

get a big tank and bury it?

fill it when fuels cheap, draw from it when the price goes up, if the price dips top the tank up.. keep a count and you can work out your own price per litre. buy from yourself when thats cheap, elsewhere when it isn't.

the tank doesn't have to be huge, its amazing what you could save with a few tens of 25 litre tanks, all depends on your mileage.

as for this 'service' i'll bet there is small print only covering you for a small increase in price, anything due to government action, taxes etc won't be covered.. or after a month of two they will just declare bankrupcy, and the money will never be seen again. good luck with the slips of paper you got.

this sort of thing works on the larger scale, small scale its probably not worth the admin cost.
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Evostick, 24 May 2007 @ 3:59am

Techdirt, not Financedirt
"The difference is that airlines don't lock in prices by buying up fuel way in advance."

Yes they do. Airlines buy futures. They also buy other derivatives, you describe a call option but this isn't the only thing they trade in.

"In this case, drivers are only protected against an upswing; if the price of gas falls over the next two months, then they'd appear to be out of luck, having already bought gas in advance at a higher price."

People play a premium for the downside protection (similar to an insurance premium). They drivers aren't getting a raw deal. Usually, a forward contract is constructed so no premium is paid.

But you miss the point. The service isn't about speculating. It's about hedging. It allows guaranteed fixed costs to be included in budgets. A small road haulage company would be able to fix all of it's costs and stick to the quotes it has made.

"Really, this kind of business only works during periods of time when gasoline prices are moving relentlessly higher (as they are now)"

No, this kind of business only works for volatile commodities (such as gas). The direction of the market is less relevant.

"Under normal conditions, nobody is going to buy gas in advance or attempt to anticipate market swings"
er.. people do, all the time. Up until now it's just not been easy for the end consumer to do so.

"though this could probably be accomplished satisfactorily simply by buying the stocks of oil companies"
Not really.
Lots of capital outlay required to buy the shares in the first place.
Oil is turned into much more than just gasoline.
Oil Share prices are effected much more by the overall stock market.

"this system isn't likely to work"
You've not really given a valid reason why this is true. Stick to tech stories.
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Andrew, 24 May 2007 @ 5:03am

What?
Is it not true that if this catches on it will just drive up the price of gas to everyone? You can not get ahead of the petroleum distributors for very long. Not only will they increase the prices to stave off your hedge, but the increased demand on the product in the short term will in itself drive up the price of gas.......this is a bad idea.
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Shohat, 24 May 2007 @ 5:13am

Re: Techdirt, not Financedirt
Great reply.

Should be attached to the original blog post - it's amazing how inaccurate it is.
People should realy stick to what they know . I don't see how a gas-related financial tool is related to Techdirt.
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Overcast, 24 May 2007 @ 5:17am

The best way to 'stick it to the gas companies' is really to only buy gasoline there.

Don't buy coffee (typically their largest profit item) or other trinkets. They get quite a good chunk of their income from novelty items, drinks, and such...
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The Dondatta, 24 May 2007 @ 5:21am

Solution
This company is yet another reason why Bush needs to get out of office! COUNTDOWN TO 2008!
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Anonymous Coward, 24 May 2007 @ 5:25am

Re: Overcast
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Anonymous Coward, 24 May 2007 @ 5:33am

Re: Overast
Something is funny with the posting stuff here….

Anyway, the food and stuff is how the gas station makes money. The gas companies make their money through selling fuel to gas stations. With a smaller, more local place (Which, at least where I am, usually has lower prices than the Mobil) like Cumberland Farms, or Stewarts, you’re right. Those places make their money off of the other things. But a Mobil or Shell, which is directly connected to the oil producer, will make quite a bit of money directly off of the gasoline. But the small guys aren’t the ones you want to stick it to.
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Evostick, 24 May 2007 @ 6:26am

Re: the best way to 'stick it to the gas companies
Is to buy a bicycle
Is to live closer to work
Is to work from home
Is to NOT BUY GAS!
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flicmod, 24 May 2007 @ 6:32am

Don't be so naive...
Gas prices are up all over the world. You really think one man is responsible for the entire worlds gas prices going up? Please! That's a cop out. Just because you don't like the guy doesn't mean you can pin stuff on him that he has no power over. Be logical.

Anonymous Coward is right. Gas stations are the ones that make the money from all the convenience store items they sell. What a world it would be if oil companies made money off the tastey-kake you bought! Most stations are set up as franchises and the ones that aren't are mom'n'pop stores. If you just stop buying convenience items, you hurt the small business owner, not the oil companies.

Unfortunately, the quickest, most effective way to hurt the oil companies is to just stop buying gas... which can never happen. That's not practical. I say we dismantle OPEC for starters. The world would be a much better place without those gluttonous pigs around.
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Anonymous Coward, 24 May 2007 @ 6:36am

Re: Don't be so naive...
"Unfortunately, the quickest, most effective way to hurt the oil companies is to just stop buying gas... which can never happen. That's not practical."

True, but with the suggestions above you can limit your own consumption thus lower YOUR cost.
If everyone did this, yes prices would go up, but there are alternative fuel sources in the not-so-distant future.
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discojohnson, 24 May 2007 @ 6:41am

Re:
modern gasoline kind of goes stale after 3 months, which is why unless you own a lawn service company, keeping around your dad's 5 gallon gas can is pointless. the stale fuel doesn't burn efficiently and, when left in the mower during the off-season, will gum up your carbs as the petrol starts to evaporate. 'course you could invest in a ton of fuel stabilizer but that just keeps it from turning into goo in the tank (for your car)
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Sanguine Dream, 24 May 2007 @ 6:50am

Re: Re: Overast
Correct. Most small "ma & pa" stations are lucky if they make $.10 per gallon of gas. Just going in and buying nothing but gas would do much more damage to the small places than the ones owned by oil producers.

If you only buy from the big time stations the money is going straight to the oil company.

If you only buy from the small time stations you will pay more because the small stations usually have higher prices for gas. Those higher prices come from the fuel distributors charging more to ship the fuel to the small time stations that are out of the way and the gas companies also charge more since more than likely the small stations won't have much choice when it comes to picking a fuel distributor (remember delivery charges).

About the only real way to stick it to the oil companies would be to stop buying fuel from them period.
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flicmod, 24 May 2007 @ 7:10am

Re: Re: Don't be so naive...
Point taken about personal gas conservation. Alt fuels are still a ways off from becoming widespread enough. The E85 craze isn't proven to actually be effective, nor is it on a large distribution scale. I fully support alt fuels though. I just don't think we're that close to having alt fuels as readily available as we'd like it to be.
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rstr5105, 24 May 2007 @ 8:03am

Currently I work at a Mom and Pop gas station.
Our Prices are:

87 octane: $3.199
89 octane: $3.299
94 octane: $4.409

we currently make about $.035 on every gallon of regular (87 octane) sold. less than that on the higher grades. Right now I thin we are actually selling super (94 octane) at a loss.
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Pro, 24 May 2007 @ 10:32am

Gas is cheap
Funny thing to me is... People are complaining that the price of gas is too high, yet their actions - in buying oversized vehicles and driving at will - don't match.

If gas were truly expensive, people would actually modify their behavior.
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Chris, 24 May 2007 @ 1:14pm

Re:
There is a company in Montana or Michigan or some other M state that has been doing this for years. Last summer I read about someone who bought 10,000 gallons at under $1 a gallon in the mid 90s and he uses that gas today. They didn't have 2 month restrictions either.

The company is First Fuel Bank (http://www.firstfuelbank.com) located in St. Cloud, MN. I seen the story on the Today Show some time back (first time I seen good old St. Cloud, MN on national news.) Their plan allows you to pre-purchase gas at current price and then you get a card you can use at their pumps to dispense your gas. There is no limit on the amount of time you have to use your gas.
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Andrew, 24 May 2007 @ 1:36pm

Some fuel oil companies already do this. You can buy a certain number of gallons before winter at a set price and then get it delivered when you need it, or you can wait until you need the oil and buy it at the market price.
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Rich K, 24 May 2007 @ 2:00pm

Re: Re: the best way to 'stick it to the gas compa
If you live in a large metropolitan area (like DC) then living close is not financially feasible. Riding a bike from the outlying communities isn't going to work either unless you want to bike for a few hours to get to and from work. Working from home might work depending on what you do. Not buying gas? If # 1,2,and 3 work for you then that is an option. If not, you are then out of luck. For most people that isn't an option.
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John DeArc, 1 Jan 2008 @ 9:36am

This is a great idea. If a person cant figure out that its a good idea to start buying stocks of gasoline on large drops in price such as 20% from the high, then they deserve to pay more for their stupidity. Outside of some miracle discovery, gas trending higher in our liftime is a no brainer.
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scott, 22 Apr 2008 @ 5:52pm

In reality we should just establish a non-OPEC market and invite Russia, Canada, and Mexico to join, and if possible, Venezuela(if Chavez loses power, we can make a financial incentive to get them out of OPEC) and undercut OPEC's prices, put real free market to work.
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Wunderkind, 9 Jun 2008 @ 9:28am

Re: Re: Re: the best way to 'stick it to the gas compa
I live in DC and bike to work. It's very easy. I used to live & work downtown, now work in Tyson's and bike. Still very easy.

I hope gas prices continue to rise until people who think like you're thinking are forced to change. Maybe you can't live in the suburbs and have a 3500 square foot house anymore - but you certainly can live in any city in the US without being so far from your work that you can't bike. We need a paradigm shift in the way we view what is "essential". In the end, regardless of environemntal concerns, I think we'll have nicer lifestyles as a result of the community fostered without the sprawl.
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wow, really?, 13 Aug 2008 @ 11:41am

Re: Re: Re: Re: the best way to 'stick it to the gas compa
Okay, Wunderkind. Yes, it's been two months since you posted your virtuous treatise, but I just can't help myself. What a very unfortunate way to think. Not everyone can hold down a $40k job in a major city as a congressional gopher, or PR person, or whatever you are. Some people -- we usually call them "most Americans" -- have a lengthy, costly commute to work. They can't help it, and your "if they don't like it, they can move" simplicity says much about you and your anti-drilling friends. Last I checked, Joe Blow in Peoria couldn't care less what you thought about his lifestyle.
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Anonymous Coward, 24 Nov 2008 @ 8:33pm

Re: Is this a scam?
How about electric.. very viable now, and becoming more promising. Gas is for suckers - hedge your bets any way you would like. Supply will go down, demand will likely rise - basic economics...
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tan, 6 Jul 2011 @ 7:21pm

Re:
do you have the website of the company?
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Anonymous Coward, 27 Jan 2013 @ 2:34pm

this is nothing new Not a scam I have done this for over 20 years
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