How can this U.S. gas cooperative sell gas for $ 1.00 a gallon?

[astro]

I read the explanation but I must be missing something because it doesn’t makes sense to me.

98 cents a gallon?! Are they serious?
Yup, if you’re a lucky member of a Minnesota gas cooperative

ST. CLOUD, Minn. - St. Cloud is a 60-mile, maybe two-gallon drive from the Twin Cities. Never heard of it? Well, listen up: In a nation of $3 gas, St. Cloudian Larry Behrendt fills up his van for …

“I’m paying 98 cents a gallon for my gas right now,” he says.

That’s under a buck!

Now we’ve got your attention, here’s why it’s so cheap. St. Cloud is home to the nation’s first fuel bank.

“We have a lot of the aspects of a money bank,” says First Fuel Banks’ Jim Feneis. “People are making a cash deposit, but they will withdraw gas.”

Customers buy gas in bulk, up front, then use a simple card each time they fill up from their reserve. The price remains fixed to the day they bought the gas.

Contractor John McDowall runs a fleet of 70 vehicles.

“Savings for us is like $150 a day for our fuel savings, which equates to about $4,500 a month,” he says. When the fuel bank opened back in 1982, the price of a gallon of gas was $1.10. Today, AAA says the national average sits at $2.92.

The mayor fills up here. So do city vehicles. It adds up to big savings for St. Cloud.

“So far it’s going to amount to $50,000,” says city employee Chuck Koetter.

Is the mechanism that upfront money already paid was/is invested and the return on this money lets them sell gas for far less than it costs them? What about the costs of storing and pumping the gas?

[Askance]

Is it not clear from “Customers buy gas in bulk, up front … The price remains fixed to the day they bought the gas”? They paid for it years ago and are just taking delivery now. They have forgone the interest on that money of course, but I’d guess the increase in petrol prices has more than covered that. It didn’t have to be that way and they were taking a risk - in effect speculating on oil prices.

[Mr.Slant]

The part that could kill an arrangement like this is the storage costs.

[Shagnasty]

@Mr. Slant

The part that could kill an arrangement like this is the storage costs.

I doubt they are holding on to any gas for that long. The people that paid for gas in 1982 are probably just getting filled up with the gas that was put in yesterday courtesy of someone else buying gas at today’s prices for use next year. I am sure the model is a lot more complex than that and they probably do have somewhat long-term storage but that is probably the general idea.

The OP is a little misleading. It isn’t like anyone can get in on 98 cents a gallon gas now and there are probably very few members of the coop that still have some available at that rate.

[enipla]

I did pretty much the same with propane. Signed an agreement to buy so much fuel for the next year at such and such a price.

[kanicbird]

Who is going to sell the co-op gas at under $1/gal?, I doubt that they really stored gas since 1982.

[Uncommon_Sense]

@kanicbird

Who is going to sell the co-op gas at under $1/gal?, I doubt that they really stored gas since 1982.

They didn’t store the gas that long, gas has a really short shelf life.
They purchased the rights in '82 to buy X amount of gallons of gas at .98/gallon sometime in the future. The future being now. The money was invested by the co-op for 25 years and now they are basically using that money they were sitting on to buy gas at today's prices and sell to those who purchased the futures (for .98/gal). Like someone else mentioned, there is probably only a couple of people filling up at .98/gal (remember, that's .98 in 1982 dollars).

[mhendo]

Southwest Airlines are currently seeing the benefits of a similar arrangement, in which they hedged against the rising price of oil. As this article from last year explains:

While it’s difficult for any airline to be profitable at $60-a-barrel costs and today’s low fares, one airline has been largely unaffected. Southwest is the one consistently profitable major airline because its management was smart enough to buy 85% of the fuel required for this year’s operations when oil was around $26 a barrel. The other six major airlines are now at the mercy of the market that isn’t likely to get relief any time soon.

<snip>

So how long can Southwest enjoy 2003 oil prices? The airline is locked in at $32 a barrel for 65% of its fuel needs in 2006, $31 a barrel for 45% of its needs in 2007, $33 a barrel for 30% of it needs in 2008, and 25% of its fuel needs at $35 a barrel in 2009. So basically, it has a few years left to enjoy that wise decision.

And oil has risen over $10 a barrel since that article (it’s currently over $70), so Southwest is saving even more than it was last year.

[samclem]

The one guy in the article who is paying .98 cents/gal for his gas could have purchased it as recently as 1999.

So, knowing that he uses 700 gal/year, he gave them $700 x 7(or however many years he locked in for). So, he gave them $5000. The gasoline company purchased futures contracts(or some similar option vehicle) and now all are locked in at that low price for however long they chose. And it doesn’t take into account the nickel/gal in interest cost/year that he lost in putting out that much money. But he was one of the luckier ones.

Of course, the people who lock in at $2.69/gal in the last month or so may not fare that well, if the price of gasoline drops back to $2.00/gal.

The example used is probably one that was the most extreme and probably doesn’t reflect a typical user.

[Hampshire]

So, as in Samclem’s example, the guy bought $5,000 worth of gas (at $1/gallon) in 1982 to be used 24 years later when the same amount of gas is worth $15,000 or $3/gallon.
I think that’s a pretty poor investment. That’s an annual return rate of 4.7% of your initial investment with compound interest. Pretty crappy for a 24 year investment.

[Uncommon_Sense]

@Hampshire

So, as in Samclem’s example, the guy bought $5,000 worth of gas (at $1/gallon) in 1982 to be used 24 years later when the same amount of gas is worth $15,000 or $3/gallon.
I think that’s a pretty poor investment. That’s an annual return rate of 4.7% of your initial investment with compound interest. Pretty crappy for a 24 year investment.

And in reality the guy has been using his pre-purchased gas this whole time. So it isn’t like he waited til gas was $3.00/gal to start filling up his tank, he’s been tapping that original investment this whole time, so that makes it an even worse investment (since he was filling up at $1.06, $1.45, $2.10, etc the whole time).
Right?
(We’re not sure how long the guy has been sitting on his futures without using them…or has he been tapping that gas the whole time?)

[samclem]

@Hampshire

So, as in Samclem’s example, the guy bought $5,000 worth of gas (at $1/gallon) in 1982 to be used 24 years later when the same amount of gas is worth $15,000 or $3/gallon.
I think that’s a pretty poor investment. That’s an annual return rate of 4.7% of your initial investment with compound interest. Pretty crappy for a 24 year investment.

But, if he bought it in 1999, then it was a good investment. I could find nothing that would indicate he bought it in 1982.

[Hampshire]

I think the whole article is misleading.

When the guy claims “I’m paying 98 cents a gallon for my gas right now” that’s bogus.
What he should be saying is “I’m using gas right now that I paid 98 cents a gallon for back in 1982”.

[drachillix]

@samclem

Of course, the people who lock in at $2.69/gal in the last month or so may not fare that well, if the price of gasoline drops back to $2.00/gal.

Guess you could just go to a regular gas station and save your “banked” gas for later increases.

[drachillix]

@Hampshire

So, as in Samclem’s example, the guy bought $5,000 worth of gas (at $1/gallon) in 1982 to be used 24 years later when the same amount of gas is worth $15,000 or $3/gallon.
I think that’s a pretty poor investment. That’s an annual return rate of 4.7% of your initial investment with compound interest. Pretty crappy for a 24 year investment.

And just may be the key to the whole thing. If you have a group of people investing that money in exchange for X gallons of fuel over X time you could in theory amass a small fortune. With a 4-5% return they could easily be raking in a nice bit of change on the difference between that and average market return.