Contributors
Thomas J. Langan- Contributor

Mr. Langan has fifteen years experience in trading and risk management of petroleum products, natural gas, and electricity. His clients range from oil companies to municipal utilities to the state of California. He held the position of oil products Trading and Risk Manager for a major energy company in California until 1997, when he established WTL Trading. [go to Langan index]

Gasoline & Diesel Price Protection Program
A New Approach to Consumer Control of Fuel Prices…
[Thomas J. Langan] 6/24/04

In January 2004, the average retail price of regular unleaded gasoline in California was $1.67/gallon, and diesel fuel was $1.68/gallon. Gasoline now averages $2.25/gallon, and diesel is $2.20. Those higher fuel prices cost California consumers an additional $31 million each day for the same fuel they purchased in January.

Too bad consumers couldn't have locked in January-type prices for a few months or more; too bad they couldn't have bought insurance against higher prices for a few months or more. Consumers are constantly exposed to higher fuel prices, and have little recourse except to complain to politicians -- who themselves are mostly clueless about higher fuel prices. Accordingly, they excoriate oil companies, demand release of strategic petroleum reserves, or debate energy bills ad nauseam. So because OPEC and terrorists have driven the price of oil up 40% in six months, the American people just have to sit back and take it, right? NOT SO!

A way to protect against higher gasoline and diesel prices has existed for more than 25 years. The solution is a Gasoline & Diesel Price Protection Program, and all that's needed is a champion to help bring the Program to average consumers.
Here's how the Program will work -- and what a supportive legislator can do to get us there.

It should be understood at the outset that the Program is a free market solution, and oil companies are not hiding it. Oil companies are good at boiling oil and converting it into fuel and other products for our consumption, but in doing so, they pass along costs that are driven by OPEC and terrorism, as well as the financial burdens imposed by regulations and taxes. So although they get the blame for higher fuel prices, they are merely a cost "funnel", not the source.

The solution proposed here to higher fuel prices will benefit consumers, the state, and the country - and oil companies, too. The solution: a Gasoline & Diesel Price Protection Program (G&D3P) that will empower consumers to guard against higher gasoline and diesel prices by making price protection (a.k.a. hedging) instruments available to them in the right form and on-line during energy market hours.

The Program will offer three hedging choices:

A - Insurance against higher prices

B - Fixed price

C - Fixed price plus insurance against lower prices

Choice A will be available for everyone. Choices B and C will only be available for qualified consumers who must pass a "test" to access them.

Here's an example of how Choice A would work for a consumer in gasoline:

Commuter "Robert" buys about 100 gallons of gasoline per month. The current average unleaded regular price is $2.25/gal. Robert thinks gasoline prices may go as high as $2.75/gal in the near term, costing him an additional $50 per month over current prices. He decides to participate in Choice A of the G&D3P, which can protect him against prices exceeding $2.40/gal for the next three months for an average fee (premium) of 4.2 ¢/gal. Robert signs up for 50 gallons per month (half his volume) and pays the premium (totaling $6.30 for three months) by credit card.

At the end of the three-month period, Case 1 or Case 2 occurs:

Case 1 - the price of unleaded regular gasoline averaged $2.65/gal for the three-month period. Robert is reimbursed $(2.65-2.40)/gal x 150 gals, or $37.50, to his credit card.

Case 2 - the price of unleaded regular gasoline averaged $2.15/gal for the three-month period. Robert receives no reimbursement because the average price of $2.15/gal is less than $2.40/gal (his "insurance level" price) for the three-month period.

If "Robert" were a business, the same transaction would apply - except the volume of gasoline and, therefore, the premium paid by Robert (and potential reimbursement) would be different.

If "Robert" were a trucking company, Choice A would be available on the diesel side of the G&D3P.

•••

The G&D3P is financial in nature so while it will effectively mirror the "real world" retail market, it will have no environmental impact and consumers need not change their lifestyles to participate (e.g. consumers need not go to a service station for reimbursements, nor will they need to provide receipts for actual purchases of gasoline or diesel during the time they participated in the Program to prove they bought fuel in the "real world").

The G&D3P has been presented to staff at the California Energy Commission and was favorably received. It is currently being reviewed by two major oil companies, one headquartered in Texas with operations in California, the other in Pennsylvania. What is needed now is a champion in the political arena to jump start development and implementation of the Program.

Here's what the political champion(s) can do:

• Fund development of a web site (for around $25,000) to serve as a proxy for the G&D3P to educate consumers and oil companies on what can be done and how to do it.
• Help provide incentives, from verbal encouragement to tax deductions, for oil companies, financial institutions, or others to implement the Program in California and elsewhere.
• Work with the U.S. Department of Energy to provide incentives to oil companies and others to implement the Program throughout the country.
• Provide for arm's length oversight of the Program to ensure performance and prevent potential abuses by trading companies.

The only truly new element of this Program is the market in which the hedging instruments will be available. Hedging instruments have been used in wholesale energy markets for over 25 years. In fact, a department of the state of California has effectively used them in natural gas since 2002. It's about time - and the right time - to empower consumers in California, and the nation, to use those instruments through a Gasoline & Diesel Price Protection Program. CRO

copyright 2004 Thomas J. Langan