Consumers locking in gas prices

[Atreides]

I read this story on Yahoo! news and it's an interesting one.

 

Basically customers buy and pay for fuel at a fixed price now and can withdraw it at the pump at future dates as they require. The interesting part to me is that they can withdraw from their reserve as needed. If gas prices are high, withdraw at lower prices. If gas prices are lower than what you paid for your reserve, hold off.

 

First Fuel Banks bills itself as the only retailer in the country where customers can buy gasoline for the future and hedge against rising prices.

 

I'm not sure how the company makes money exactly but they did mention that they buy futures in the market. My guess is part of their plan is to make use of the up-front payments and invest it in other stuff.

 

What do you guys think?

[Enoch]

I'm not sure how the company makes money exactly but they did mention that they buy futures in the market.  My guess is part of their plan is to make use of the up-front payments and invest it in other stuff.

 

What do you guys think?

<{POST_SNAPBACK}>

I'd imagine the main advantage for the company is that the customers lock themselves into buying from their stations. They gain market share because they offer an ancilary service that the other stations don't. They hedge their bets by buying futures (offsetting assets & liabilites makes them essentially neutral to fluctuations in gas prices) and fund the overhead of running the whole program with a modest increase in their prices.

[alanschu]

And the reserve is going to run out eventually, so it's not like people will continue to buy the gas at much cheaper prices. Unless they make a heck of a deposit, at which point the company has made a huge capital gain that they can invest with.

[Fenghuang]

I'd invest and sell it off later at a profit, then invest more.

 

Gas stations here need to do this crap.

[Surreptishus]

Yes, but would you be able to exercise that option? I'm thinking its more like fixing your interest rates for mortgage.

[Fenghuang]

Meh, there's gotta be a way to get the gas. I'd have a friend pay me and then they'd just get it the same way I do, or I'd get it for them.

 

Just like 'side money' for fixing computers! )

[Atreides]

I wonder how long before gas prices fall. There may be a mini bubble. Warren Buffet was saying that fundamentals fuel the initial rise but then speculation can take over towards the end.

[LadyCrimson]

I'm more concerned with rising, over-inflated home prices than rising gas prices, myself.

 

But that is an interesting way to help an area combat/delay gas price-hike adjustment periods for those who really need it - er...or those who hear about it first, anyway. heh

[Atreides]

Good news for you then. Buffet's predicting that the inflated property market's going to cool down.

[Walsingham]

You mean they hang onto your cash until they decide to lower it to the point where you want to buy. But until that point they are holding your cash? Sounds like genius to me. For them.

[SteveThaiBinh]

I guess consumer choice is a good thing, so if people want to do this, fine. I think some people or companies may be willing to do this, even if it ends up costing slightly more in the long run, in order to take some risk out of their finances.

 

Incidentally, the Saudi government cut petrol prices by 30% last week. A litre of petrol now costs about 10p here.

[Walsingham]

Let me guess, the Saudis were complaining about the 'pain at the pump'?

[Atreides]

You mean they hang onto your cash until they decide to lower it to the point where you want to buy. But until that point they are holding your cash? Sounds like genius to me. For them.

You agree to buy A amount of gas for $X per unit (gallons, litres etc). When you want to, you withdraw from your reserves which have been prepaid. That's fixed.

 

So if gas prices other places are higher than X, say $3.60 while your X was $2, you're "saving" the difference. You may want to withdraw from your reserve at their stations.

 

If gas prices are lower than your X, say $1.60 obviously you're going to buy gas elsewhere and not withdraw from your $2/unit reserve.

 

You choose when you wish to withdraw.

[Walsingham]

You're really not takinga ccount of the benefit they get from hanging onto your cash.

 

On the other hand I don't think I understand the issue of how their pricing works. My point was suppose you buy into the scheme at 2 bucks. They then hoik the price to 4 bucks. You don't buy at that price, but theyre still holding your cash so they are winning. Suppose it never comes back down again, then they keep your cash forever and you get nothing.

 

Please explain for me, as I have a small brain.

[Atreides]

You're really not takinga ccount of the benefit they get from hanging onto your cash.

 

On the other hand I don't think I understand the issue of how their pricing works. My point was suppose you buy into the scheme at 2 bucks. They then hoik the price to 4 bucks. You don't buy at that price, but theyre still holding your cash so they are winning. Suppose it never comes back down again, then they keep your cash forever and you get nothing.

 

Please explain for me, as I have a small brain.

<{POST_SNAPBACK}>

I did take into account them holding on to the cash upfront. Please reread my original (first) post at the top of the page. I actualy thought about the same questions as you did.

 

The part that we disagree is that I think the consumers keep an eye out on other (ie BP, Shell etc) providers. It's not that they're limited themselves to just the original company. If anything they use the company relative to how other oil providers are priced.

 

If the original company's not comopetitive or too wacky in its own pricing there'd be no long term incentive to sign up, which would be bad. The only "floating" rate that the company probably has is for offer prices on reserve purchases.

[metadigital]

You're really not takinga ccount of the benefit they get from hanging onto your cash.

 

On the other hand I don't think I understand the issue of how their pricing works. My point was suppose you buy into the scheme at 2 bucks. They then hoik the price to 4 bucks. You don't buy at that price, but theyre still holding your cash so they are winning. Suppose it never comes back down again, then they keep your cash forever and you get nothing.

 

Please explain for me, as I have a small brain.

<{POST_SNAPBACK}>

It's just Petrol Futures for the small investor (see Derivatives).

 

Bear in mind that the futures market is like roulette on crack: that's what brought Bearings Bank down, and it can cost exponential amounts of money compared to the time gambled.

 

For example, it would be better to keep the $2 petrol for much later. Petrol isn't going to go down in price (long term trend), so keeping that for later, when petrol climbs over $6, will help dollar-cost-average the future petrol.

[alanschu]

You're really not takinga ccount of the benefit they get from hanging onto your cash.

 

On the other hand I don't think I understand the issue of how their pricing works. My point was suppose you buy into the scheme at 2 bucks. They then hoik the price to 4 bucks. You don't buy at that price, but theyre still holding your cash so they are winning. Suppose it never comes back down again, then they keep your cash forever and you get nothing.

 

Please explain for me, as I have a small brain.

<{POST_SNAPBACK}>

 

 

Errr, if they jack the price up to $4, then you will most certainly be utilizing your reserve.

 

If you buy 100 liters of gas at $2, and the price goes up to $4, you'd be on crack to decide to not use this place, because you'd effectively be getting your gas at half-price.

[metadigital]

The biggest problem with futures (and derivatives in general) is that there is no guarantee that the short-term price fluctuations will show any positive correlation with the long-term trends ...

[Walsingham]

Excellent, finally we have a thread PROVING I'm an idiot. :D :">

[LadyCrimson]

Good news for you then.  Buffet's predicting that the inflated property market's going to cool down.

Cool down...yes...go backwards...unlikely.

I think where I live, gas has gone up much less, percentage wise, than houses, over the past couple decades. Could be wrong tho, I'm no statistic dynamo.

 

I guess I'm one of the few who just doesn't see rising gas prices, for the average modern consumer, to be that big of a deal. Sucks to pay more, but everything costs more over time, not just gas.

[metadigital]

Excellent, finally we have a thread PROVING I'm an idiot.  :D  :">

<{POST_SNAPBACK}>

I think you are quite clever, in a Socratic manner: just ask Nick Leeson ...