Hedging Against Pump Price Increases
It’s no secret I drive a lot in my commute to work and back. A good day sees me traveling about 60 miles round trip. If I go elsewhere, have to use my car to go someplace else, and factor in personal millage, this can easily be 100 miles a day. I work 6 days out of every 10 (ignoring overtime for the moment), and therefore tot up – for the sake of argument – about 1,500 miles a month. Even though I have a super-efficient car even by today’s standards, this equates to a lot of money spent on fueling the beast.
My trip computer reckons I get about 65.7 mpg, averaged out over the last 400 miles. It’s been at or around this figure ever since I adjusted my driving style to maximum frugality, without dawdling everywhere at 15mph. At current pump prices of around 106.9p/litre (£4.85/gallon for my US visitors), that’s a monthly cost of about £92.15. Factor in personal millage, and I come out to about £115/mo.
Except, on paper, I now spend £125/mo on fuel.
Why? Hedging.
I calculate what it would have cost me to buy the fuel if the price had been 115.9p a litre (£5.27/gal), and then save the difference in a high interest bank account. Taking into account compound interest, this covers me currently should prices reach 116.9p without actually touching capital funds for about 2 months. As time goes by and fuel prices hopefully stay the same or reduce, then this buffer will increase in length of serviceable time, or cover higher short-term fluctuations without reducing my spending power. I also continue to hedge on fuel even when I’m not driving, such as annual leave, or when I’m being put up in a hotel for a week in the course of my work.
A little example:
Yesterday, I purchased 18.7 litres of diesel (£20 on the pump) at 106.9p/litre. I had a 3p/L off voucher, so this took my actual purchase down to £19.44, saving me 56p. Hedge charge is currently 115.9p/L, so I transferred £2.25 into my hedge fund. This only actually ‘cost’ me £1.69 to do, courtesy of the money-off coupon.
British and American drivers can do this alike with ease – an ING Direct ’sub-account’ can be used to segregate your fuel hedge fund. Or, if you don’t use ING, then just account for it on paper in your own financial planning. As an added bonus, certainly here, every time I park down town I get a 3p/litre off voucher on the back of my meter ticket. The difference is also hedged!
By making minor alterations to how you spend, you can prepare to ride out the inevitable short-term price hikes in gas prices. When times are good, keep your spending the same to build up your hedge fund. When times are lean, use your resources to make up the difference. Review your hedged bets every 12 months. Does your current per-month spend equate to reality? Dip-Check your receipts for a month. Have gas prices moved on since you set up the initial spend figure? Has your cost-of-living wage increase come in? You can use this effectively here because gas prices are a real, every day, ‘in your face’ “cost” of living.
The beauty of hedging is it isn’t limited to fueling your car. You can do exactly the same again for electricity, mains natural gas, water and other utilities. Yes, this involves being disciplined with yourself – no one likes spending more than they have to; but overspending by a little every time can help to mitigate or entirely absorb price fluctuations down the road that otherwise really would affect your bottom line.
Good luck! Share your thoughts in the comments. Part 2 on effective withdrawals will follow shortly. 
Related Posts- Frugal Friday! 20 Ways to Cut Your Annual Vehicle Costs
- Petrol Hedging - Update
- 2p Petrol Duty Increase Coming
- My Financial Meltdown: Part 3
- Frugal Friday! 21st Century Haggling in 6 Steps
Related Websites
