Excluding food and energy, the CPI rose 0.2% to a year-over-year rate of 1.1% in February, so say the stats published by the US government. My family buys a lot of food & gas! But I digress. By manipulating what is included in the calculation, our government has gone to great lengths to convince us that inflation is virtually non-existent. However, just in case the price of "things" you regularly purchase, like gas, does end up increasing…you can do something about it.
Let's say you drive 10,000 miles per year and your vehicle gets 15 mpg. Let’s also assume that gas prices are $3/gallon. This means you will need to stockpile $2,000 worth of gas to get you through the next 12 months. Since zoning laws frown upon the idea of installing gas tanks in our backyards, how can we hedge against the risk of further increases in gasoline prices?
It is no secret that I am a fan of ETFs (exchange traded funds) because of their low cost and transparency. In addition to many other commodities, there is an ETF for gas – UGA. If we were to invest $2000 in shares of UGA (approx. 40 shares), we could effectively hedge the price of gas for one year! If gas prices move toward $4 - $5 per gallon the appreciation of UGA will help offset your costs.
If your spouse and teenagers also drive 10,000 miles per year, you will want to adjust the calculation to reflect that. Also, depending upon the type of account you use, the long-term capital gains rate of 15% would reduce the effect of the hedge. Something to consider as we pay our Spring break bills and look forward to summer vacations…
Cost breakdown of a gallon of gas:
Crude Oil: 67%
Taxes (Avg.): 13%
Refining Costs: 11%
Marketing/Transport: 9%
Source: US Dept. of Energy
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