First off, I’ve written just recently about gas prices, and how low they have gone. A recent post on $2 gas discussed the topic of these prices that are low relative to recent historical gas prices, and how we might want to keep that history in mind when making big financial commitments going forward.
In other words, be careful when putting your budget together, and don’t make the assumption that gas prices will remain low. I say it’s best to assume they’ll go back up, and if they stay low we can consider it a pleasant surprise. Kind of a bonus, if you will.
Picking up on this theme, I came across an interesting article on Time’s Money site that discussed the concept of locking in gas prices at a fixed rate. This allows a consumer to hedge against the potential that gas will go up.
There were a couple of services mentioned, but one that caught my eye was a small regional group of stations that apparently has a plan like this. In looking at the site, it appears that you can pre-pay locked-in prices at around $1 or so above the current at-the-pump prices. Obviously there are additional details to the program, but this is a high-level summary of what saw.
The way I understand it is this: If gas is $2 per gallon, and you lock in prices at $3 per gallon, you could potentially come out ahead if prices surge back up over $3 as we has seen for quite some time.
It’s an intriguing concept, and it reminds me of the “Forever Stamp” model. Perhaps it’s not quite the same thing, but the idea that you can lock in prices is one that seems like an interesting option for consumers and a novel idea in commerce.
It also seems like one is paying a premium – like an “insurance” premium of sorts – to protect against risk of loss. In this case, loss of money when gas prices skyrocket.
This is something I’d have to really think about before deciding on whether or not to do that. I’m not aware of any local companies offering this sort of option anyway, at least at this time.
Could this idea be applied to other expenditures in our budget?
When it comes to one big ticket expense, housing, we can lock in prices by getting out of the renting cycle and buying a property. Though property taxes could always change, even if your mortgage payment stays the same.
But how about things such as coffee, produce, perhaps even heating oil? It would be fun to be able to “lock in” the price of a cup of coffee that normally costs $1.50 by paying $2.50. Maybe years down the line, when coffee is well over $2.50, we’ll come out ahead : )
Okay, that last example is a bit much. But you get the idea!
My Questions for You
What do you think of the idea of prepaying for gas?
Can you think of any other expenses that would be nice to have a pre-paid, locked-in price option?
We did this with our heating oil for our home each year, this year being a bad example, but in years past it saved us money as prices jumped and we were locked in at a constant price. A bit of a gamble, but if it’s an item like gas, oil or a house as in your example that you know you will have use for over many years odds are you’ll save some money.
Glad you were able to save money in past years. This year is different, which is a part of the risks I would think.
Interesting concept. I’ve always wished that there could be more smoothing of prices versus the spikes that seem to define every increase. As an example, when was the last time the price went up just three cents? Here, anyways, the answer is a long long time. What happens is the price will go up at least 15-20 cents at a time. There’s no logic to this in my mind.
It’s interesting how gas expenditures can be a decent part of one’s budget, yet be so variable to the degree you point out.
When we lived in the country and had propane we usually did lock in a price for it. Usually in Aug./Sept. when prices were a bit lower prior to the heating season, we would call our supplier and if the rate was down, we’d lock in a price for a thousand gallons or so. A few years back, I read that Southwest Airlines locked in a huge amount of jet fuel at a cheap(er) price and was able to not raise fares for a long time when the cost was going up for other carriers. Can’t image more didn’t do the same. You can lock in your mortgage payment with a fixed rate mortgage instead of using a floating rate. Cell phone and cable contracts can lock in a rate for a couple of years if you don’t mind being tied to one company for that long. Coffee? Well, if you buy it in vacuum sealed cans, it will keep a long time so you could buy up a lot of cans and hold out during the price increases.
There really are a lot of ways to “lock in” prices, good examples.
Hedging is usually done when you have a lot at stake such as the airline industry with the cost of fuel. Most consumers so not drive that much and have other options to reduce the cost. There is a cost for hedging and I think it would be better to put money away when gas is low for the times it is higher. Another choice would be to change vehicles or driving habits which many have done. Ironically, Lar ge cars are popular again because gas is cheap. Careful, this is momentary and it will go up again.
Hmm. I do like the idea of being able to lock in a price but it’d feel weird if the premium was pretty high and I am not the type to buy in bulk per say. Just like even though I know stamps will cost more several years from now and it would be nice to “save”, it kinda goes against my nature to spend more/save more. Cuz who knows what the future will hold – we may not even need stamps several years from now, and we may not need that much gas in the future either. I do like the out of the box offering though. It’s always nice to have more options.