Tuesday, March 13, 2007

Locking In Gas Prices When They're Low

I saw an interesting article at NPR on locking in low gas prices. Here is what they said along with my comments.

There you are, steamed at paying $3 for a gallon of gasoline. So how does it feel to learn that some people are paying $2 dollars, or even a buck a gallon? That's because they bought it from a small chain of gas stations in central Minnesota that allows customers to pre-pay for gasoline, and stockpile it for when prices jump. Remember the summer of 2006? I paid as high as $3.40 per gallon. I would love to be able to lock in low gas prices now and use it up in the summer. Like most people our summer hobbies end up consuming a lot of gas and the gas companies tend to like to raise the prices during the summer.

First Fuel Banks has six gas stations in the St. Cloud, Minn., area, where customers can buy as much gasoline as they like, whenever the price seems right. First Fuel then stores the gasoline in its oversized tanks, or buys futures contracts for really long-term purchases. Pre-paying for gasoline requires that customers tie up their money for a while. Think about it, if you buy 400 gallons of gas today at roughly $2.50 per gallon that is $1000 dollars. If gas goes up to $3.50 this summer you end up saving $400. That is a 40% return on you hedge. Take a look at the 3 year chart below compliments of Gas Buddy. Gas prices over the last 2 out of 3 years peaked in August. Even if gas didn't peak they sure didn't go down in the summer.

But otherwise, there's no charge for the program, aside from a one-dollar membership fee. And it can yield huge savings. Thousands of First Fuel customers are able to fill their tanks for less than $2 a gallon. CEO Jim Feneis says that a few hundred of his customers actually locked their prices in at less than $1 a gallon. The advance-purchase option was once only available in Minnesota. But soon it will get a tryout in 11 northeastern states. Gulf Oil CEO Joe Petrowski plans to introduce the advance-purchase option later this year at about 1800 Gulf stations from Delaware to Maine. Bring it on. I hope more gas companies will do this. When you think about it how often do you go to the same gas station. Chances are you buy from a lot of different locations. If you pre-bought your gas, guess where you would buy it from? The same station. In principle gas station owners told the general public that they did not make anymore money when gas was $3.00 vs. $2.00 per gallon. So if that is true the gas companies can sell it to you when it is low price and then you can consume it when it is higher. Sounds like a great idea to me.
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