PDA

View Full Version : Why don't Gas Companies Offer Contracts?


Gangster Octopus
05-01-2006, 02:58 PM
Suppose I wanted to hedge my personal gas cost risk by buying gas forward. I now retty much how much I use each month, so in theory if someone wanted to sell me 50 gallons of gas in August for $3.50/gallon (I live in Cali) I might want to buy it at that price. I wouldn't actually have to take delivery, it could just be settled financially. Of course the problem with that scenario is I don't think I can by such small quantities on the regular commodities market. One option would be to create a kind of buyer's pool to aggregate to a reasonable size. But couldn't the gas companies offer a pre-pairoption, kind of like a cell phone contract. I.e. you have 50 gallons a month for 12 months at $3.50/gal? (I realize you can buy pre-paid cards, but those are in dollar terms, not qty.) I would think companies, presuming they got the right price would also want to lock in some cash flow and not be subject to the vagaries of the marketplace.

JohnT
05-01-2006, 03:13 PM
Suppose I wanted to hedge my personal gas cost risk by buying gas forward. I now retty much how much I use each month, so in theory if someone wanted to sell me 50 gallons of gas in August for $3.50/gallon (I live in Cali) I might want to buy it at that price. I wouldn't actually have to take delivery, it could just be settled financially. Of course the problem with that scenario is I don't think I can by such small quantities on the regular commodities market. One option would be to create a kind of buyer's pool to aggregate to a reasonable size. But couldn't the gas companies offer a pre-pairoption, kind of like a cell phone contract. I.e. you have 50 gallons a month for 12 months at $3.50/gal? (I realize you can buy pre-paid cards, but those are in dollar terms, not qty.) I would think companies, presuming they got the right price would also want to lock in some cash flow and not be subject to the vagaries of the marketplace.

That idea has been done before, most notably by Jeff Skilling at Enron. The "Gas Bank" was essentially a long-term service and supply contract where Enron would offer a multi-year contract to supply companies with petroleum products for a locked rate - for example, a 20-year contract locking in gasoline purchases at $4.00/gallon. As the purchaser, you'd probably jump all over that because, even if the price of gas stays below $4.00/gallon for the next few years, when it goes up you'll clean up, buying $8.00 gasoline for $4.00.

And that was the problem - finding people to sell petroleum products at long-term rates. Again, what happens to the seller if he has to supply a $4.00 contract when the price of gas is $8.00? He gets it handed to him, $4.00 a pop. Sell a million gallons and you're out $4 million.

Skilling was able to crack the nut, though, by developing a computer network that allowed for near-instantaneous price updates and trading. He used Enron's ability to gain financing to help create the market, and the Gas Bank, in its original form, became quite the innovation.

I don't think the idea would go over well today - too much volatility in the current market.

Exapno Mapcase
05-01-2006, 03:27 PM
Large corporations contract for gas in advance. Southwest Airlines was renowned in the field by locking in cheaper gas prices before price hikes.

But it's hard to see why oil companies would do this with smaller customers. They can ramp up prices very quickly, and also slow any declines so they don't need to be protected from the vagaries of price shifts.

A futures market already exists in crude oil. Again, those are in enormous quantities. Most commodity futures are in raw materials rather than in finished goods.

So the question you need to ask is, what would make the oil companies gain by doing this? I don't know what that answer might be.

t-bonham@scc.net
05-01-2006, 04:44 PM
Farmers have been doing this for years. But you have to actually take delivery of the gas.

You can buy a few hundred gallons of gas at any time, at the current price, delivered to your gas tank on the farm. Then you use it up over the next few weeks or months. You don't even have to pay the gas tax on it, if it's exclusively for farm implements that don't go onto the public roads. Or you pay tax on a part of it, in proportion to the amount that is used by farm vehicles that do go onto the roads (like your truck).

At many suppliers, you can even set buy orders at a specific price; you tell them to deliver when the price drops to $2.40/gallon.

Musicat
05-01-2006, 04:56 PM
Farmers have been doing this for years. But you have to actually take delivery of the gas.Maybe not all at once. It's not "gas", as in fuel for automobiles, but in my neighborhood, we banded together to approach residential propane suppliers for a discount rate and a lock-in for a year. It worked, and about 50 homeowners switched companies when one offered a better rate with no minimum requirements. I'm sure more would have switched except they had leased, not owned, tanks, and were beholden to the company that leased them.

And residential fuel oil suppliers regularly offer 1-year contracts in the fall for an option lock-in at the current price. For the last 5 years, I refused, and was rewarded in 4 of those years by paying LESS than my neighbors who signed up, as the price declined through the season instead of rising.

Chairman Pow
05-01-2006, 11:16 PM
A futures market already exists in crude oil. Again, those are in enormous quantities. Most commodity futures are in raw materials rather than in finished goods.

A futures market already exists in unleaded gas as well.

The problem is that you have to "buy" 42,000 gallons at a time....

So, for example, your August gas closed at 2.115 today, meaning had you bought, so you can do the math for how much it would cost.

Now, of course you have to take delivery of this stuff or pay for warehousing. Then there are likley legal requirements of a private citizen taking delivery.

The Swan
05-02-2006, 01:24 AM
Farmers have been doing this for years. But you have to actually take delivery of the gas.

You can buy a few hundred gallons of gas at any time, at the current price, delivered to your gas tank on the farm. Then you use it up over the next few weeks or months. You don't even have to pay the gas tax on it, if it's exclusively for farm implements that don't go onto the public roads. Or you pay tax on a part of it, in proportion to the amount that is used by farm vehicles that do go onto the roads (like your truck).

At many suppliers, you can even set buy orders at a specific price; you tell them to deliver when the price drops to $2.40/gallon.

Let's all make sure we differentiate between Futures Contracts and Forward Contracts.

gigi
05-02-2006, 11:14 AM
And residential fuel oil suppliers regularly offer 1-year contracts in the fall for an option lock-in at the current price. For the last 5 years, I refused, and was rewarded in 4 of those years by paying LESS than my neighbors who signed up, as the price declined through the season instead of rising.
I declined until this past fall when I got paranoid at what the prices might do. I ended up only having to fill the tank once this winter so I've still got a credit balance for next year.

control-z
05-02-2006, 02:45 PM
Yeah I know how this works. I'll buy 50,000 gallons and the next week Mr. Fusion will be invented.

JohnT
05-08-2006, 01:18 PM
http://www.cnn.com/2006/US/05/08/gas.bank.ap/index.html

Gas for two bucks? Go to the fuel bank
Paying in advance -- way in advance -- nets big savings

Monday, May 8, 2006; Posted: 1:14 p.m. EDT (17:14 GMT)

ST. CLOUD, Minnesota (AP) -- Most motorists are feeling the pain as gasoline creeps toward, or over, $3 a gallon -- but not Art Altrichter...

Of course, when the people get caught on the other side of the curve, then the article won't be so glowing and calls will ring out for an "excess profits" tax on the greedy "oil company." ;)