Hedging Gasoline Price

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Hedging Gasoline Price

Postby Leesbro63 » Thu Jun 27, 2013 11:20 am

How can one prepay/hedge the price of gasoline? Say buy 2 years worth at today's prices. UGA?
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Re: Hedging Gasoline Price

Postby Grt2bOutdoors » Thu Jun 27, 2013 11:41 am

If you think selling price of gasoline is/will be going up while the margins to produce it will also increase commensurately (larger crack spread) you may want to buy a refiner's equity - something like Marathon Petroleum or Phillips 66 or even just an energy sector fund.

Playing with gasoline derviatives is just asking yourself to get burned. Believe each contract is for 50,000 gallons. How much driving do you do in 2 years time?
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Re: Hedging Gasoline Price

Postby mollymillions » Thu Jun 27, 2013 2:01 pm

You can get some 50-gallon drums and roll down to the quick stop ;)
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Re: Hedging Gasoline Price

Postby Stonebr » Thu Jun 27, 2013 2:05 pm

You could trade your car for one that gets significantly higher mpg.
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Re: Hedging Gasoline Price

Postby Ged » Thu Jun 27, 2013 2:06 pm

Lithium futures.
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Re: Hedging Gasoline Price

Postby TO » Thu Jun 27, 2013 2:43 pm

Leesbro63 wrote:How can one prepay/hedge the price of gasoline? Say buy 2 years worth at today's prices. UGA?


Simple. Since this falls into the category of rank speculation, simply make a wager with someone willing to take the other side of your bet. Peg a price per gallon today, and determine the volume of gas you expect to consume for the next 2 years. Settle up at the end of year 2. If the price goes up, you collect (average price over 2 year period - peg price per gallon) * volume. If the price goes down, you pay (peg price per gallon - average price over 2 year period) * volume. Then pay me 10% of the amount transferred for arranging the transaction.
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Re: Hedging Gasoline Price

Postby Quickfoot » Thu Jun 27, 2013 2:55 pm

I bought a Jetta TDI, it was just ranked the most fuel efficient car in America. I've been getting on average 44 MPG in the city and 50-60 mpg on the interstate at 75, it also has a diesel engine that lasts on average twice as long as a regular gasoline engine.

Storing large quantities of gasoline is not feasible because gasoline degrades in a short period of time (< 60 days without a fuel stabilizer additive, around 1 year with an additive).

Short of buying a fuel efficient car the next best thing to do would be to have a career where you are going to get regular pay increases, at least matching inflation (preferably comfortably exceeding it) and invest excess income wisely.
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Re: Hedging Gasoline Price

Postby Ranger » Thu Jun 27, 2013 3:01 pm

Grt2bOutdoors wrote: Believe each contract is for 50,000 gallons.


42,000 gallons
http://www.cmegroup.com/trading/energy/ ... tions.html

As mentioned you can buy Refiner stocks or use crack spread futures.
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Re: Hedging Gasoline Price

Postby Leesbro63 » Thu Jun 27, 2013 3:05 pm

Quickfoot wrote:I bought a Jetta TDI, it was just ranked the most fuel efficient car in America. I've been getting on average 44 MPG in the city and 50-60 mpg on the interstate at 75, it also has a diesel engine that lasts on average twice as long as a regular gasoline engine.

Storing large quantities of gasoline is not feasible because gasoline degrades in a short period of time (< 60 days without a fuel stabilizer additive, around 1 year with an additive).

Short of buying a fuel efficient car the next best thing to do would be to have a career where you are going to get regular pay increases, at least matching inflation (preferably comfortably exceeding it) and invest excess income wisely.


But once you factor in the premium cost of diesel fuel, is it still the most fuel efficient? I'm sure it's still close but the higher-than-gasoline premium is not a throwaway.
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Re: Hedging Gasoline Price

Postby Leesbro63 » Thu Jun 27, 2013 3:07 pm

TO wrote:
Leesbro63 wrote:How can one prepay/hedge the price of gasoline? Say buy 2 years worth at today's prices. UGA?


Simple. Since this falls into the category of rank speculation,


I don't think this is RANK speculation. It's something I will definitely need to consume. I'm willing to trade the possibility of the price-to-me going down for the certainty that the price-to-me to not go up. And the bet is ONLY for the amount I would consume. Totally different than guessing that hog futures will rise or fall.
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Re: Hedging Gasoline Price

Postby Grt2bOutdoors » Thu Jun 27, 2013 6:55 pm

Leesbro63 wrote:
TO wrote:
Leesbro63 wrote:How can one prepay/hedge the price of gasoline? Say buy 2 years worth at today's prices. UGA?


Simple. Since this falls into the category of rank speculation,


I don't think this is RANK speculation. It's something I will definitely need to consume. I'm willing to trade the possibility of the price-to-me going down for the certainty that the price-to-me to not go up. And the bet is ONLY for the amount I would consume. Totally different than guessing that hog futures will rise or fall.


How much gasoline do you consume in a years time? Take that amount and purchase a pure play refiner (only) - you will earn a spread above invested amount. Say the margins on gasoline production increase - your investment in the refiner will likely increase exponentially. There was an article in WSJ yesterday about Gulf Coast refiner expectations to increase profit margins significantly as land-locked oil at Cushing OK becomes freed up with all these new pipelines leading to the Gulf Coast - refiners mentioned were Marathon, Exxon, Phillips 66. On the other hand, if margins fall or collapse, look for your investment to deflate.
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Re: Hedging Gasoline Price

Postby Wagnerjb » Thu Jun 27, 2013 7:31 pm

Ranger wrote:
Grt2bOutdoors wrote: Believe each contract is for 50,000 gallons.


42,000 gallons
http://www.cmegroup.com/trading/energy/ ... tions.html

As mentioned you can buy Refiner stocks or use crack spread futures.


I am afraid that may not work. If crude oil jumps by $20/bbl and crack spreads narrow, your Refining stock will get hurt and gasoline will cost more too. If you try to hedge using crack spreads, the same thing can happen.....rising crude oil price and narrowing crack spreads causes your hedge to backfire.

Best wishes
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Re: Hedging Gasoline Price

Postby sometimesinvestor » Thu Jun 27, 2013 7:39 pm

Wagnerjb wrote:
Ranger wrote:
Grt2bOutdoors wrote: Believe each contract is for 50,000 gallons.


42,000 gallons
http://www.cmegroup.com/trading/energy/ ... tions.html

As mentioned you can buy Refiner stocks or use crack spread futures.


I am afraid that may not work. If crude oil jumps by $20/bbl and crack spreads narrow, your Refining stock will get hurt and gasoline will cost more too. If you try to hedge using crack spreads, the same thing can happen.....rising crude oil price and narrowing crack spreads causes your hedge to backfire.

Best wishes

I don't usually suggest individual stocks but if you feel big oil is the big bad then you could conclude that if gasoline goes up in value exxon(xom) will figure out how to make money .I am certainly not confident my suggestion will work but i am positive that if exxon goes out of business in the next two years(or even drops by 50%) the price of gasoline will NOT be our biggest problem.
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Re: Hedging Gasoline Price

Postby Grt2bOutdoors » Thu Jun 27, 2013 7:48 pm

Wagnerjb wrote:
Ranger wrote:
Grt2bOutdoors wrote: Believe each contract is for 50,000 gallons.


42,000 gallons
http://www.cmegroup.com/trading/energy/ ... tions.html

As mentioned you can buy Refiner stocks or use crack spread futures.


I am afraid that may not work. If crude oil jumps by $20/bbl and crack spreads narrow, your Refining stock will get hurt and gasoline will cost more too. If you try to hedge using crack spreads, the same thing can happen.....rising crude oil price and narrowing crack spreads causes your hedge to backfire.

Best wishes


Since you're in the business I'll take your word for it. Just one question though, don't refiners have access to different feedstock with their own price differentials? If the refinery was geared towards converting a higher proportion of lower cost feedstock into higher margin product, they could come out ahead.
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Re: Hedging Gasoline Price

Postby Rainier » Thu Jun 27, 2013 7:49 pm

It's not speculation because he is going to use the gasoline, it is hedging. He likes the price now and wants to lock it in.

The cheapest way would be options or options on futures. If such a thing exists you could buy options on gasoline futures for two years out. Otherwise find a company that is highly correlated to gas prices and buy long dated options.

In the end though, I think you will find it is just very expensive insurance.
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Re: Hedging Gasoline Price

Postby letsgobobby » Thu Jun 27, 2013 8:57 pm

As stated, a Prius or similarly fuel efficient hybrid or gas vehicle is also highly efficient at hedging against future fuel price increases. The VW diesels are tempting though overall reliability especially catastrophic failures of the Golf TDI fuel pumps are a big deterrent.
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Re: Hedging Gasoline Price

Postby gnphiker » Thu Jun 27, 2013 10:47 pm

Well, I remember reading several years ago about a place in Minnesota that would let you pre-purchase your fuel. So, went looking and sure enough here it is: www.firstfuelbank.com It would be interesting to know if any other places like this exist around the U.S.
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Re: Hedging Gasoline Price

Postby Ranger » Fri Jun 28, 2013 12:01 am

Wagnerjb wrote:I am afraid that may not work. If crude oil jumps by $20/bbl and crack spreads narrow, your Refining stock will get hurt and gasoline will cost more too. If you try to hedge using crack spreads, the same thing can happen.....rising crude oil price and narrowing crack spreads causes your hedge to backfire.

Best wishes


Yes it is not perfect correlation. Generally Crack spread tracks RBOB closely during summer, but certainly understand point you are trying to make. Here is my 3:2:1 crack chart (click to enlarge)

Image
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Re: Hedging Gasoline Price

Postby madbrain » Fri Jun 28, 2013 12:54 am

Just how much gas do you consume ? What is the fuel efficiency of your current vehicle(s) ?
A Prius is likely the best candidate.

If you feel more adventurous, drive less than 70 miles a day and live in a place with affordable electricity, you may be a good candidate for a Nissan Leaf electric car . They are not for everyone.
But in some states with the current government incentive, the lease payment on those cars can be less than what you would pay in gasoline alone on a gas guzzler.
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Re: Hedging Gasoline Price

Postby Valuethinker » Fri Jun 28, 2013 4:37 am

Leesbro63 wrote:How can one prepay/hedge the price of gasoline? Say buy 2 years worth at today's prices. UGA?


Since gasoline does not store well, this is not easy-- 2 years gas would be a perfect hedge. Financial futures don't come in retail size. Nor AFAIK are there stocks perfectly correlated (not even refiners like Valero I do not think).

Therefore:

- the 'natural hedge' is to cut consumption -- buy a truly efficient vehicle like the Chevrolet Volt (potentially you will use *no* gasoline, depending on how your driving pattern is)

- owning oil wells, eg via MLPs, would have a strong correlation with the price of oil, which has a very high correlation with the retail price of gasoline (US gasoline market is peculiar, particularly 'summer gasoline' rules which vary by state/ area, cause market imperfections). Oil stocks generally would have a lower correlation (but enough of one that a diversified portfolio of the oil majors would provide some protection)

- there is an ETF I believe, OIL? However its price does not well track the market price of a barrel of crude. You really need a hedging vehicle which can own the physical commodity (but then storage costs give you a negative expected return)

The main thing you can do is own a really efficient car. And with the existence of Plug In Hybrids, that's now possible. However gasoline is usually the 3rd largest cost in owning a car behind depreciation and (potentially) insurance, so the cost-benefit is not clear.

Another possibility is to switch to Compressed Natural Gas (CNG).

Another thing you could do is say store 100 gallons of gas (ie with additives enough to last you 2-3 months?). Then you have a 'rolling hedge'.

Diesel is not too bad (much higher flashpoint) but I cannot stress enough the dangers of storing large amounts of gasoline. It's a volatile liquid that turns into gas vapour very easily and burns horribly. At the very least its presence may impact your house insurance, but also the safety and well being of your family.


Just remember Napalm is jellied gasoline. That should make you cautious of the stuff.
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Re: Hedging Gasoline Price

Postby YttriumNitrate » Fri Jun 28, 2013 6:25 am

Valuethinker wrote:The main thing you can do is own a really efficient car. And with the existence of Plug In Hybrids, that's now possible. However gasoline is usually the 3rd largest cost in owning a car behind depreciation and (potentially) insurance, so the cost-benefit is not clear.


While it might be hard to find a plug in hybrid that your not going to take a major hit due to depreciation, there are plenty of older E85 vehicles out there. At least here in the Midwest it seems like the price of E85 is a whole lot less volatile than regular gasoline.
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Re: Hedging Gasoline Price

Postby Valuethinker » Fri Jun 28, 2013 6:29 am

YttriumNitrate wrote:
Valuethinker wrote:The main thing you can do is own a really efficient car. And with the existence of Plug In Hybrids, that's now possible. However gasoline is usually the 3rd largest cost in owning a car behind depreciation and (potentially) insurance, so the cost-benefit is not clear.


While it might be hard to find a plug in hybrid that your not going to take a major hit due to depreciation, there are plenty of older E85 vehicles out there. At least here in the Midwest it seems like the price of E85 is a whole lot less volatile than regular gasoline.


That may be because ethanol is produced in the Midwest (don't get me started on the crazy economics of this ;-)). But generally, that should not be the case. In that 85% of the cost is still driven by crude oil price, and rationally the people selling E85 should simply price off the best available substitute (ie gasoline). Unless there were an oversupply of E85 relative to gasoline, the price differential should be pretty constant.

(in truth, as I vaguely recall reading, the argument is running the other way with the EPA-- there are not enough 'ethanol certificates' (I don't remember the exact details) and so refiners are scrambling to get ethanol supply, which would speak to a *higher* E85 price (or lower differential from gasoline price) than otherwise-- I am vague on the details though).
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Re: Hedging Gasoline Price

Postby Valuethinker » Fri Jun 28, 2013 6:31 am

YttriumNitrate wrote:
Valuethinker wrote:The main thing you can do is own a really efficient car. And with the existence of Plug In Hybrids, that's now possible. However gasoline is usually the 3rd largest cost in owning a car behind depreciation and (potentially) insurance, so the cost-benefit is not clear.


While it might be hard to find a plug in hybrid that your not going to take a major hit due to depreciation, there are plenty of older E85 vehicles out there. At least here in the Midwest it seems like the price of E85 is a whole lot less volatile than regular gasoline.



Just on depreciation the argument has raged on another thread. It does not appear to me that there is tangible evidence that hybrid cars depreciate at a faster rate than comparable petrol engined cars. There are enough Toyota Prius in the USA now for the data to have credibility.

HOWEVER hybrids cost more than their nearest comparable, so if you have a higher starting value, even on the same years depreciation, you will potentially have a higher depreciation cost (depending on residual value).
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Re: Hedging Gasoline Price

Postby Valuethinker » Fri Jun 28, 2013 6:38 am

Valuethinker wrote:Diesel is not too bad (much higher flashpoint) but I cannot stress enough the dangers of storing large amounts of gasoline. It's a volatile liquid that turns into gas vapour very easily and burns horribly. At the very least its presence may impact your house insurance, but also the safety and well being of your family.[/b]

Just remember Napalm is jellied gasoline. That should make you cautious of the stuff.


Side effect of having a father who was a military engineer, I think.

When I see a gasoline tanker or a truck full of propane bottles, I think 'bomb'. Dad used to drive by police stations and other government buildings etc. and give his 5 second opinion of what would happen if there was a car bomb on the sidewalk, etc. He was very good after 9-11, explaining what must have happened to the Twin Towers, and also WTC 7 (short answer, naked steel loses its structural strength when heated, and so the buildings just folded in on themselves).

I guess once someone has been trained to think about how to improvise destructive weapons to destroy buildings, (he was also a small boy during the London Blitz-- had a famous tale of watching a V1 buzz bomb attack), they never quite lose that mindset.

London has been hit by enough IRA attacks in my working lifetime for me to think similar thoughts-- they used to blow up the bridge near where I lived with regularity.

I also saw someone burn to death once, and that, too, is a constant reminder of what burning gasoline can do.
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Re: Hedging Gasoline Price

Postby Valuethinker » Fri Jun 28, 2013 6:39 am

madbrain wrote:Just how much gas do you consume ? What is the fuel efficiency of your current vehicle(s) ?
A Prius is likely the best candidate.

If you feel more adventurous, drive less than 70 miles a day and live in a place with affordable electricity, you may be a good candidate for a Nissan Leaf electric car . They are not for everyone.
But in some states with the current government incentive, the lease payment on those cars can be less than what you would pay in gasoline alone on a gas guzzler.


Probably a Chevy Volt or other PHEV? Gives you the optionality of being able to go on long gasoline powered journeys, but for shorter distances choosing to be all electric.
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Re: Hedging Gasoline Price

Postby livesoft » Fri Jun 28, 2013 7:28 am

I thought everyone on the forum was buying Teslas.

But I suppose Leesbro63 was inspired by the doomers thread about cash yesterday and decided to keep gasoline in his home instead of cash. :) Besides, isn't gasoline better for zombies than cash?
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Re: Hedging Gasoline Price

Postby ML 59 » Fri Jun 28, 2013 7:46 am

I Dollar Cost Average. At the pump. Twice a week.
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Re: Hedging Gasoline Price

Postby Leesbro63 » Fri Jun 28, 2013 8:03 am

You guys are overthinking this. I am the original poster. I do not want to buy a hybrid or an electric vehicle. We have 3 drivers and 3 cars and use about 2500 gallons of gasoline per year. At $4, that's $10,000. Currently it's about $3.50. I was just thinking I could use something like the ETF "UGA" to lock in today's prices. I am not a doomer or prepper. And I don't even think gasoline is likely to surge...but it does seem to keep bubbling back to around $4. What I was really asking is how well "UGA" actually mimics the price of gasoline. And if anyone else has done this.
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Re: Hedging Gasoline Price

Postby Rainier » Fri Jun 28, 2013 8:11 am

That might work, buy the options though. If gas soars the options will pay off.
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Re: Hedging Gasoline Price

Postby livesoft » Fri Jun 28, 2013 8:36 am

Leesbro63 wrote:We have 3 drivers and 3 cars ...

Here's what we did with 4 drivers: We have only 2 cars. First person out of the house gets their own car. Last person out of the house gets to ride a bike to work. The middle 2 have to carpool. 3 of us live within 4 miles of our home.
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Re: Hedging Gasoline Price

Postby letsgobobby » Fri Jun 28, 2013 8:49 am

livesoft wrote:
Leesbro63 wrote:We have 3 drivers and 3 cars ...

Here's what we did with 4 drivers: We have only 2 cars. First person out of the house gets their own car. Last person out of the house gets to ride a bike to work. The middle 2 have to carpool. 3 of us live within 4 miles of our home.

Tough crowd, yours. We all live within zero miles of home.
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Re: Hedging Gasoline Price

Postby Ranger » Fri Jun 28, 2013 8:51 am

this one is from google search

http://www.mymoneyblog.com/hedging-gas- ... f-uga.html

You can create own graph also from the yahoo data of UGA and gas price data from http://www.eia.gov/dnav/pet/pet_pri_gnd_dcus_nus_w.htm
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Re: Hedging Gasoline Price

Postby Leesbro63 » Fri Jun 28, 2013 9:08 am

Ranger, now THAT was useful. Thank you. Probably not practical, but at least that was something that actually looked at what I was thinking.
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Re: Hedging Gasoline Price

Postby Wagnerjb » Fri Jun 28, 2013 9:31 am

Ranger wrote:[
Yes it is not perfect correlation. Generally Crack spread tracks RBOB closely during summer, but certainly understand point you are trying to make. Here is my 3:2:1 crack chart (click to enlarge)


The hedge may work most of the time. But take a look a 2008 when crude oil dropped from $140 to $40 within 12 months. It is this kind of dramatic price movement that can wreak havoc on a hedge.

Best wishes.
Andy
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Re: Hedging Gasoline Price

Postby Wagnerjb » Fri Jun 28, 2013 9:56 am

Leesbro63 wrote:Ranger, now THAT was useful. Thank you. Probably not practical, but at least that was something that actually looked at what I was thinking.


If you are firm in your desire to hedge, I think UGA is your best and most practical alternative. (I have not done so for gasoline, but I have locked in natural gas prices for heating and A/C using a contract with our local utility). Your hedge will likely be very effective, but I want to point out that you are hedging your local gasoline cost using the price of (wholesale) gasoline in New York harbor. The correlation will likely be very high most of the time. But if you live in California and there is a local refinery shutdown, your gasoline prices may surge without a corresponding movement in UGA (this is because refiners outside of California generally cannot make the specialized California quality gasoline). But barring any localized market impacts (hurricanes, etc.) you should be fine. Your challenge (not a huge one) is to determine how much UGA to purchase such that your hedge is well calibrated.

Best wishes.
Andy
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Re: Hedging Gasoline Price

Postby madbrain » Fri Jun 28, 2013 6:27 pm

Leesbro63 wrote:You guys are overthinking this. I am the original poster. I do not want to buy a hybrid or an electric vehicle. We have 3 drivers and 3 cars and use about 2500 gallons of gasoline per year. At $4, that's $10,000. Currently it's about $3.50. I was just thinking I could use something like the ETF "UGA" to lock in today's prices. I am not a doomer or prepper. And I don't even think gasoline is likely to surge...but it does seem to keep bubbling back to around $4. What I was really asking is how well "UGA" actually mimics the price of gasoline. And if anyone else has done this.


2500 gallons of gasoline really is a lot. That's between 112k - 150k miles/year in 3 Prii, depending on the driving style. How many miles do you actually drive ?
At $3.50 a gallon, it seems you have relatively cheap gas, though. Even $4/gallon is still half of most of the rest of the world.
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Re: Hedging Gasoline Price

Postby madbrain » Fri Jun 28, 2013 6:28 pm

Valuethinker wrote:
madbrain wrote:Just how much gas do you consume ? What is the fuel efficiency of your current vehicle(s) ?
A Prius is likely the best candidate.

If you feel more adventurous, drive less than 70 miles a day and live in a place with affordable electricity, you may be a good candidate for a Nissan Leaf electric car . They are not for everyone.
But in some states with the current government incentive, the lease payment on those cars can be less than what you would pay in gasoline alone on a gas guzzler.


Probably a Chevy Volt or other PHEV? Gives you the optionality of being able to go on long gasoline powered journeys, but for shorter distances choosing to be all electric.


Yes, the Volt is more practical, but IMO not really cost effective unfortunately when you compare it to 1 gas vehicle + 1 Leaf. Let alone to 1 Leaf if you can live with that.
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Re: Hedging Gasoline Price

Postby avalpert » Fri Jun 28, 2013 7:53 pm

Leesbro63 wrote:You guys are overthinking this. I am the original poster. I do not want to buy a hybrid or an electric vehicle. We have 3 drivers and 3 cars and use about 2500 gallons of gasoline per year. At $4, that's $10,000. Currently it's about $3.50. I was just thinking I could use something like the ETF "UGA" to lock in today's prices. I am not a doomer or prepper. And I don't even think gasoline is likely to surge...but it does seem to keep bubbling back to around $4. What I was really asking is how well "UGA" actually mimics the price of gasoline. And if anyone else has done this.


The guy trying to hedge $10,000 in gasoline purchases for his family a year is telling others they are overthinking it?

Drive less, drive more efficiently. You have three people driving between 15000-20000 miles a year or 40-50 miles a day. Can you carpool more effectively, do you really need to drive as much as you are? Seems like paying a cost to hedge the volatility in gas prices is putting a band aid on a gushing wound.
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Re: Hedging Gasoline Price

Postby letsgobobby » Fri Jun 28, 2013 11:17 pm

Mazda has a super sweet looking all new Mazda6 coming out this fall that will get 38 mpg in the 4 cylinder and 44 mpg in a new clean diesel (both highway). Great early reviews all the way around. With your driving I think not having the most fuel efficient vehicles possible is costly.
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