Thursday, May 8, 2008

hedge yourself™ - gasoline costs

Life is full of personal expenses that are hard to avoid. Whether they're necessities and essential services that we can't go without like gasoline, hot water, food, and banking, or discretionary like clothes, restaurant fare, or alcohol. I'd like to introduce a post series (hedge yourself™) about negating, or at least buffering the affects that these personal expenses can have on our finances. The way I propose that an individual eliminates the affect of these expenses is to hedge themselves against the expense by purchasing instruments (stocks and/or income trusts), that will provide income and perhaps capital gains that will at least buffer, one's expenses in this area. More interestingly the way one will hedge these costs will be to profit from the very source of the expense. This makes a lot of sense because if one is choosing to expend money in this area, odds are many other people are doing the same. Wouldn't it be nice to make a trip to the pump, grill, bank, mall, or liquor store a net neutral financial choice? "If you can't beat em, join em!"

The elephant in the room lately when it comes to personal expenses has to be gasoline costs. Sometime within the past two years in Canada gasoline was selling for about $0.85/Liter. This price seems very attractive as I write it, because today in Brantford, Ontario gas is flowing into vehicles for about $1.20/Liter. Let's assume Joe drives the average car, a 2009 Toyota Corolla, with a fuel tank capacity of about 50L. 2 years ago Joe was paying $42.50 to fill up, while today he is paying $60. That is a difference of $17.50 per tank.

Assuming Joe fills up his Corolla once per week, he is spending an extra $17.50 today, versus what he was paying 2 years ago.

Joe is not happy about this extra $17.50, and he would like to mitigate it's affect on his budget. This is an extra $910 per year, assuming he fills up once per week. His options are limited: drive less (he has to get to work), comply with that chain email and boycott certain gas stations (this will surely get the price down...?). There is one more option that Joe may want to consider, a hedge. Joe should open a discount brokerage account if he doesn't already have one, and perform one of the following.

  • Buy 114 units of Canadian Oil Sands Trust (COS.UN). This is an income trust that pays you cash monthly when you invest your money in their business. COS.UN extracts oil from the tar sands in Northern Alberta and benefits greatly from high oil prices.

COST TO JOE = ~$5,472 for 114 units of COS.UN including a trading fee.

WHAT THIS WILL ACCOMPLISH = This investment will provide Joe with $456 per year and eliminate approximately half of the impact that high gasoline prices have on his budget. Also if Joe is willing to hold COS.UN for the long term, his investment should appreciate, and his cash from the investment should increase with high energy prices allowing his hedge to be more effective or at least keep pace with his expenditures for years.

At the end of the day this allows Joe to pay about $1.02/liter for gas when in reality it actually sells for $1.20/liter.

*taxes on Joe's investment are not included, I am not a financial advisor


telly said...

I remember, maybe 4-5 years ago, paying $13 US to fill my tank. It now costs ~$35-40 (same car). Thankfully I'm carpooling so I'm only filling up every two weeks but yikes!

You're right, hedging on regularly purchased items (especially non-discretionary) is one of the best remedies for inflating prices.

pitz said...

I'm hedging my food consumption at Boston Pizza, approximately $50/month. At a 12% yield, $5000 worth of BPF.UN units ought to do the trick.

Same deal. And the 12% yield is very attractive on a business that, as Justise points out, is completely based on a royalty structure, has no debt, and has plenty of potential for sales growth.

Dividends4Life said...

mg: I know I bought BP at the beginning of April and at the close today it is up over 16%; and it has a 4.5% dividend yield.

Best Wishes,

pitz said...

(Justise = from the Canadianbusiness forums)

shaun said...

I like the way you think. oil keeps going up so buying it would be a good idea. Trend trading maybe.

Dividend said...

An Interesting post. Why can't our gas person just buy 50,000 worth of stock, and collect the 2,000 in dividends, thus making his gas consumption "free".;=5

MG (moneygardener) said...

thanks for the comments.

telly, that is crazy growth in fuel costs..

pitz, you took the words right out of my mouth.

dividend, Joe could do that if he happened to have 50K laying around. I wanted to make the scenario a little more realistic.

Sarlock said...

Sounds good, but really it's just moving shells around. You're making an investment using capital and you expect a return on this. While it makes you feel warm and fuzzy in your mind that you are hedging yourself against higher oil prices, the net impact to your bottom line is the same: Profit on your investment, higher gasoline prices. If you apply that investment profit to offset your gasoline purchases to make yourself sleep better at night, remember that you are then assuming you are earning 0% on your capital.

No matter how you slice it, higher gas prices suck.

MG (moneygardener) said...

sarlock, your investment should move approximately with your gasoline costs so it's not really moving shells around. It's not like investing in a bank and buying fluctuating fuel. Gas prices can suck a whole lot less if you are benefiting from them in some way.

Carnivals, Festivals Blogs and Free Money - May 13 said...

..[The Money Gardener presented his post hedge yourself™ - gasoline costs.]...