Thomas J. Langan- Contributor
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
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.
be understood at the outset that the Program is a free market
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.
proposed here to higher fuel prices will benefit consumers,
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.
will offer three hedging choices:
A - Insurance
against higher prices
B - Fixed
C - Fixed
price plus insurance against lower prices
will be available for everyone. Choices B and C will only be
for qualified consumers who must pass a "test" to
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
At the end of the three-month period, Case 1 or Case 2 occurs:
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.
the price of unleaded regular gasoline averaged $2.15/gal for
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
If "Robert" were a trucking company, Choice A would
be available on the diesel side of 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
for reimbursements, nor will they need to provide receipts
for actual purchases of gasoline or diesel during the time
in the Program to prove they bought fuel in the "real
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
- Provide for
arm's length oversight of the Program to ensure performance
and prevent potential abuses
by trading companies.
truly new element of this Program is the market in which the
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