Locking in low gas prices

With all the malaise in the stock market, a few of us at the office are able to crack a smile thanks to collapsing gasoline prices–AAA says that the average price for regular unleaded peaked at $4.11 per gallon on July 17, and has dipped under $2 (actually under $1.90) this week. That’s a 54% drop in four months!

Which leads me to a question that was recently raised by someone: Wouldn’t it be great if we could lock in these gasoline prices, so that we’d be guaranteed to pay less than $2? At first, such a question just brought a chuckle. But then I began to think about it, and I discovered that there is a way to hedge your gasoline consumption.

The instrument you can use is the U.S. Gasoline Fund (UGA), which is an exchange-traded fund that tracks the price of gasoline futures. And my off-the-wall thought is this: If you want to “lock in” the current price of gasoline, you can buy some of UGA. Here’s how.

Let’s say you drive approximately 14,000 miles a year and your car gets 20 miles per gallon. That means you use about 700 gallons of gasoline per year (14,000 divided by 20 = 700). At the current rate of about $2 per gallon, that means you’re spending $1,400 per year for gasoline.

Thus, you could buy $1400 worth of UGA and hold on to it for a year. If gasoline prices rise … and you end up paying more at the pump … you’ll also end up making money on your UGA shares. For example, let’s say the price of gasoline rises 50% next month, and then stays level for all of 2009. (Unlikely, I know, but bear with me.)

That means you won’t pay $1,400 for gasoline at the pump, but $2,100 instead. However, it also means the value of your $1,400 of UGA will rise 50% to $2,100. In this scenario, you’ve “lost” $700 at the pump. But you’ve made $700 on your UGA shares. The converse is also true. If gasoline prices continue falling, you lose on your UGA shares … but, of course, you’ll “gain” by paying less at the pump.

Of course, it’s not that simple. There are commissions and taxes to consider. And, of course, gasoline prices fluctuate all the time. But the overall point is valid–if you invest in UGA, you’ll be “hedged” in case prices rise.

Is this a bit too cute? Possibly. I’m not saying I’ll rush out to buy UGA tomorrow, even though I do commute a total of 50 miles per day to work; for the average Joe, such a tactic might not be worth it.

But if you have a few family cars that you’re footing the gasoline bill for, if your job demands many more miles in commuting, or if you own a small business that operates a fleet automobiles (a small delivery service? A limo service?), it’s an option that’s available. Just something to consider as you s-l-o-w-l-y digest your Thanksgiving turkey (and mashed potatoes and green beans and squash and … ).