Hedging Gas Cost

[BC69]

I figured people are starting to think about gas costs more and more these days, so I thought I would share something I gave to my friends a few years ago when gas was $2, no one listened to me, except for me...and they should have.

I figured you can sort of hedge your at pump gas costs with ETF's in the market. There are a few options, ones that track oil, West Texas or Foreign. OIL is the ticker for one. There are also ETFs that track gas cost. UGA? I am blanking on the name. Do a simple correlation calculation. For every dollar change in gas over the past few years, how much does the ETF change in % gain. Lets say it goes up 10% for each dollar at the pump. (I am just making up numbers for easy math)

Then figure out your average miles driven a year. Lets say 10000, and average MPG, lets say 20. So thats 500 gallons, and at $3 that is $1500 bucks. If gas goes to $4 that is $2000 bucks. You are out $500 now. But if you own the ETF in the market, you gained 10%, if you had invest $5000, you are now even on your fuel costs. If gas goes down to $2, you made $500 at the pump, and lose $500 in the market. Its a hedge, not really a speculation.

Obviously, the smart guys on here are going to rip apart the perfect degree of measuring the correlation. I agree its tough, but did it with about 4 ETFs and its fairly consistent over time. Others might think $5000 is a steep investment, I was just making up numbers, and it could be less or more. You can get leveraged ETF's that give 2x or 3x the return on less investment (but they use debt and won't trend perfect with the underlying commodity).

You could also use this if you are deciding between a Jeep and a Pruis lets say, just figure out how much more gas you would use in the Jeep, hedge the gap and feel better about yourself.

I was in NYC when I did this for my friends with cars, I just bought the underlying ETF, no hedging since I didnt have a car. Look at OIL in 2008. I am not complaining when I fill up these days.

Cheers!