Saturday, March 3, 2012

The Average Joe's Guide to Beating $5 Gas

The content of this post diverges from my usual Lake George related material and describes a method by which the average American can offset rising prices in gas, heat, food, clothing, etc.  As the owner of a business which consumes copious amounts of oil and relies on gasoline to fuel the cars that bring guests to our hotel, I spend a lot of time thinking worrying about ways to offset the impact of rising gas and oil prices.  Here is what I have come up with: 

During the last decade, the use of exchange traded funds (ETFs if you want to sound cool) have become all the rage.  An ETF is a fancy term for a stock which invests in bets on the direction of anything from the value of the dollar to the value of oil. There is an ETF for everything (even a social media ETF) and ETFs can be traded using a free brokerage account (E-Trade, TD Ameritrade, etc) for as little as $7 per trade.

What does this have to do with $5 gas?  Let's say that you believe that the price of a gallon of gasoline will increase to $5 (*vomit*).  Furthermore, let's assume that you will drive 2,500 miles this summer.  Assuming that your car averages 25 miles per gallon of gas, you will consume 100 gallons of gas.  If gas prices increase to $5 per gallon from today's $3.73 national average, then your costs will increase by $127 this summer (100 gallons X $1.27 per gallon increase in price).  Bottom Line: You will spend $127 more and get nothing extra for your money.   

Now to the good news.  Remember the ETFs (the stocks that allow you to invest in bet on almost anything)?  There is an ETF that tracks the price of gas (ticker: UGA).  So, if the price of gas increases by 10%, then the value of UGA will increase by approximately 10% (less expenses).   The Friday close of UGA was $56.48 per share.  If you purchase 20 shares of UGA for $1,129.60 ($56.48 X 20), and the price of gas increases to $5 per gallon, then UGA would rise to approximately $74 per share.  If you sell at the $74 mark, you would make a $350 profit on the sale of the ETF (($74.00-$56.48) X 20).  To determine your overall profit, subtract out the $127 that you paid in additional gas costs.  Bottom Line: You turn a $127 loss into a $223 profit from $5 gas (the math is boring but I am happy to lay it out step-by-step to anyone who emails me a request).

There is a risk of loss involved with this process.  If you are wrong, and the price of gas decreases, the ETF will lose value and you take a loss. No one wants losses but the loss that you take on the sale of the ETF is partially offset by the fact that you  pay less at the pump (remember that a decrease in the price of gas triggered the decrease in the value of the ETF).  Moreover, losses incurred while trading ETFs are usually tax deductible while price increases in gas are not. 

I realize that this post has absolutely nothing little to do with Lake George or the Motel Montreal but most of our guests are not rich and increases in gas, heating oil and food prices decrease the amount of money that a family spends on fun.  Less discretionary family income means less nights at the Motel Montreal, which means my family suffers.  Additionally, I am deeply disturbed by the notion that paying for life's necessities has become a substitute for the family vacation.  It is my hope that this post helps someone and that he or she returns the favor by coming to Lake George and staying with us at the Motel Montreal.  Feel free to call me at (518) 668-5439 with any questions or to discuss (I love this stuff).  Life is too short to worry about price hikes.  The kids grow up too fast and we need to enjoy the time that we have with the people that matter most.

Disclaimer: There are risks involved with investing in ETFs and any financial instruments.  Nothing in this post should be construed as advice to invest in a particular financial instrument.  As of the time of writing, I do not have any positions in the ETFs mentioned above but I am considering taking a long position in the gasoline and heating oil ETFs.

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