I don't know about you, but 2008's oil spike made me angry.
Back in the middle of the year oil was sitting around $140 a barrel and gas was $4.50 a gallon. It took me about $50 to fill up the tank of my Corolla -- which really got my blood boiling.
I'm still bitter about who actually got my money. Some of it surely went to the Middle East, some of it ended up with 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 in the third month of 2009 and oil is sitting around $50 a barrel -- which is pretty cheap, in my opinion. In fact, some modest estimates put oil at $75 in the next three months.
So with looming price increases, do we have to sit back and live with increasing prices at the pump? I don't think so…
There's a simple way that you can control the price you pay for gas over the next five years. Actually, you could be paying the 2009 price in 2014. And heck, you could even lock in today's price for the next 10 years… that's like paying 2009 prices through 2019. Had you made this same move 10 years ago (in March 1999), you'd be saving 48% at the pump -- so basically, every mile you drive would cost half. That's not bad at all.
Of course this won't make any sense if you think gas prices are high today. You'd have to assume that prices are going to rebound and prices at the pump will be much higher in five years. Honestly, I'd say that's a pretty safe assumption.
So if you're still onboard with this idea, I'll get down to the details -- but first, let's look at today's gas prices...
The Gas Price Debate
As it stands, the current national average is $1.92. Take a look at the 10-year chart:
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This chart shows the 10-year bull market in oil and gas prices. It also shows the huge correction in prices since July 2008. But the one thing that this chart clearly portrays is that even with major corrections, the price of gas is on the way up. Waaaaay up.
Frankly, every time I fill up my Toyota Corolla for $19 bucks a tank, I get a little giddy. Compared with 2008's price run-up, it feels like I'm stealing every gallon I get.
That's a feeling I want to have for years to come.
So how's it possible to keep this low price for the next five or 10 years?
Hedging Without the Hedge Fund
Hedging has been around for centuries, but interestingly enough, not many consumers use it -- which I think is a mistake.
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. By hedging his crop, he'll be able to lock in the price he receives. And that makes perfect sense: If I were a farmer and put my life into growing corn, I'd be damned sure to guarantee a fair price for my harvest. Otherwise, I could get burned when the harvest came in -- imagine getting half the price you expected.
Another example is when airlines hedge the price of crude oil or jet fuel. Much like a farmer, airlines have a lot of risk. That's why most major airlines use hedge contracts to control the prices they expect to pay for their fuel. 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's the best way to hedge?
In lieu of owning your own gas station and controlling your own prices, here's what you can do: Buy into the United States Gasoline Fund (UGA: NYSE).
The fund has been around for a little over a year and offers a pure way to hedge the price you pay at the pump.
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! And as long as you hold shares, you'll be completely protected from any movements in gas prices.
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.
Take a look a the one-year chart:
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As you know, gas prices have taken a beating over the past year -- which has made for some cheap fill ups lately. And that's exactly why UGA has also fallen. But I don't expect prices to stay low -- 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 $24 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-$2 gas for the next five years sounds OK to me.
"To Whiskey and Gunpowder,
"First, I'd like to thank you for the work you do and the analysis you provide. Were it not for the information that is given (free) on a regular and periodic basis, I would have no standard against which to measure the bullshit economic analysis streaming out of the "mainstream media". You guys provide the perspective that I need and that to which I refer, so as to assess what is really going on. My personal email inbox only exists to catch and read the vignettes provided by Whiskey and The 5, as I find they alone are worthy of my continued attention, study and dissection on these economic times.
"That - and I'm busy (with 3 kids and a 4th on the way) between family and work. You guys shoot straight and stay on point with your message. Love it.
"My only complaint, if you can even call it one, is that I wish that 'Whiskey & Gunpowder' were named instead 'Bourbon & Gunpowder' as I selfishly prefer Bourbon to Whiskey. Admittedly, 'Whiskey & Gunpowder' has more intrinsic sex appeal in the title, so I'll let it go. I do forward your articles from time to time though to various family and friends, as I see fit, and hope it spurns more review and attention for you and your work.
"Now: a question which I will title 'The Nitty Gritty'.
"Is the population in this country that identifies with individual self worth declining against the population that identifies with social collectivism?
"By way of background, I grew up in Colorado, but now live in a suburb of DC. I find that attitudes, broadly speaking, generally lean more toward 'collective socialism' in the city than they do out west on the open plain. I have my personal theories as to the reason that this may be true, but am deeply concerned also that it may in fact be true.
"I also recognize that it is an overly simplistic way to divide the world, as I have done, into these 2 camps. However, I've been giving much thought toward those who look toward a system for answers, versus those who look within themselves (religious affiliation or identification not withstanding) and have been trying to determine whether by and large folks are leaning toward the government answer versus establishing a sense of ownership over, and thereby attempting to solve directly, a problem that needs to be solved.
"Stated more simply, how does an entire nation continually foster that sense of individual responsibility and avoid falling victim to the idea that government can solve all of our problems?
"The second and third questions would then be: are we, as a nation, going to continue to flirt with the idea of collective socialism? And if so, why?
"Perhaps these questions may resonate with you, and if you have any insight or opinions on the matter, well - I would naturally love to hear them."
Kind Regards
Danke. Here's a whinny from the horse's mouth…a peak into the mind of a socialist….
"Hello Gary
"I read the letter the gentleman wrote from Slovakia. He just re- enforces many of the people's wishes. Basically the fear of having security. Say what you like but socialism is a far sight better than capitalism. Let me ask a few personal questions. Are your parents alive? Do you have a wife and children? Are you secure that you will always have enough money to support them and take care of all their needs, medical or otherwise? Are you so confident in your self and this present government that you will risk that health, safety and security of your closest love ones on your beliefs in a capitalistic society? I may be wrong but from all your statements in the past concerning socialism I would say you have read a lot of one-sided information. It is quite obvious you have never lived in a socialist country or even visited one.
"I am a service connected disabled veteran. I worked for the government in the military and for over twenty years civil service out of the pentagon. I was in Russia when it was communist. I was in several eastern European countries after the Berlin wall came down and they all had their new democracy. Capitalism and democracy have broken the people. The only thing that has sustained them is the government programs of socialism. At least when a socialist government takes the money from the working people it gives it back to provide security. Trust me 'peace of mind' is worth much more than any thing money can buy.
"The reason we have all these welfare programs in America is because we consider ourselves humanitarians. It was another government ploy to save face in the world. Perhaps if we would stop being such bleeding hearts and people are forced to work. Perhaps if the government would open all the factories, textile, etc. and refuse to accept goods made outside of America by American business owners we could get our economy going. So what is so wrong with government control of 'some' businesses on a temporary basis? Call it what you will, I call it creating security and peace of mind."
To answer those personal questions: I don't have many near relations and I wouldn't do something so callous and selfish as creating new ones. Considering my views on human nature it would be the highest cruelty to produce offspring who would have to deal with all these bipedal yahoos.
Second, I've been to Canada and France and I live in the U.S. so I've seen plenty of socialism. No direct experience with communism or outright fascism.
I'm feeling a little under the weather today, Shooters, so I'm going to leave the rest of this one to you. I eagerly await your answers to "So what is so wrong with government control of 'some' businesses on a temporary basis?" Have fun!
I will quote Benjamin Franklin on this one, though: "They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety."
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