Surprise! Higher Gas Prices Are Coming

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:

WnG 032409 Chart1

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:

WnG 032409 Chart2

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.

Stay ahead of the curve.

Matt Insley

The Daily Reckoning