I don’t know about you, but 2008’s oil spike made me angry.
Back then oil was sitting around $140 a barrel and gas was $4.50 a gallon. It took me about $50 to fill up the ‘lil 12-gallon tank — which really got my blood boiling.
Another reason I remain bitter stems from the fact that I don’t even know who was getting my money. Some of it went to the Middle East, some of it ended up with big international oil companies (IOCs), and a portion of it went to our government through taxes — those are three charities I normally wouldn’t hand a donation to.
So here we are six years since oil’s all-time high. Today oil is sitting around $80 a barrel – not bad, eh?
Gasoline is also “cheap.” Most of the local stations in my area are flashing prices below $3 a gallon – a far cry from those 2008 prices!
So here’s a question for you…
If you’re like me and believe that sub-$3 gasoline is cheap. And Prices are only likely to rise from here on out (think: spring 2015 driving season), wouldn’t you like to “lock in” today’s cheap gas price for months or years to come?Indeed, even with booming U.S. production, all it takes to goose the price of oil back up is a supply disruption in the Middle East. Or, if the Asian tiger economies ramp up, added demand could nudge prices higher. Add it all up and it wouldn’t take much to push the price back up to triple digits again.
You can bet your bottom dollar that gasoline prices will follow, too.
Well, today I want to share a way that you can virtually “lock in” today’s cheap price for gasoline.
It’s fast. It’s easy. Best of all you don’t need to own your own gas station to make it happen!
Hedging 101
“Hedging” has been around for centuries, but interestingly enough, not many consumers use it – a true shame in my mind.
This according to Investopedia:
Hedging is nothing more than a simple tool to offset risk.The classic example of hedging is when a farmer wants to make sure he gets a good price for his crop.
You see, a farmer has a lot at stake. They till, buy equipment, fertilize, water, and harvest their crop all without really knowing what price they’ll get for it. That’s a huge risk to take.
By hedging, a farmer is able to lock in a set price ahead of the harvest. This can come in the form of a forward contract or by using the futures market.
Another example is when airlines hedge the price of crude oil or jet fuel. Much like a farmer, airlines have a lot of risk – prices for jet fuel can swing wildly and have a drastic effect on an airline’s profitability. That’s why most major airlines use future contracts to control the prices they expect to pay for their fuel. (Or if you’re Delta, you just buy your own refinery!) Either way, it’s just smart business.
But you don’t have to be a large-scale farm or airline company to get involved.
Hedging is simple, and as long as you have risk – which you do if you intend on driving over the next five-10 years – you can easily protect yourself against the rising price of gasoline.
A Gas Hedge for You…
So what can we do to “lock in” today’s low gas prices?
In lieu of owning your own gas station, buying your own oil well and controlling your own prices, here’s what you can do: buy into the United States Gasoline Fund (UGA: NYSE).The fund offers a relatively pure way to hedge the price you pay at the pump.
In short, the fund buys futures contracts for reformulated gasoline.
Here’s what the prospectus has to say:
“The investment objective of USG is to have the changes in percentage terms of the units’ net asset value reflect the changes in percentage terms of the price of gasoline, as measured by the changes in the price of the futures contract on unleaded gasoline.”
That’s it. There are no CEOs or earnings announcements. The fund just follows the price of gasoline with the use of futures contracts. So it’s safe to assume that if gas goes higher, this fund will follow.Each share you buy could act as your personal hedge and gives you a way to ride the rising cost of gas. As the price of gasoline goes up, this fund will also rise — it’s an effective way to offset the price you pay at the pump.
Indeed, had you bought this fund back in 2009 when gas prices were insanely low (sub-$2), you’d be sitting on a 118% gain. That’s plenty of profit to offset higher gas prices.
Right now the fund is cheap. Like the price of gas, UGA is trading at a steep discount to recent prices. Take a look…
As you can see at your local station, gas prices have taken a beating over the past few months – hooray! Likewise the share price of UGA has also pulled back.But I don’t expect prices to stay low – and neither should you. Especially not over the next five or 10 years.
That’s why now may be the perfect time to hedge your gasoline usage and pick up some shares of UGA (currently trading around $50 a share). As the price of gasoline rises, so will the price of your shares.
You’ll benefit in every move gas makes on the upside, so in five years, if the price of gas triples, you’ll have that three times your investment. That’s profit that you can use to offset (hedge) the price you’ll be paying at the pump!
Under-$3 gas for the next five years sounds OK to me.
Keep your boots muddy,
Matt Insley
Get Your Gas Money Back In One Easy Step was originally featured in The Daily Resource Hunter. Check out the newest Daily Resource Hunter research video "The Price of Gas Explained".