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There's a new service available at LoveMyGasPrice.com that essentially offers you insurance against rising gas prices. It might seem like a great idea, but consider some caveats before signing up.
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Why insure?The service's websiteoffers a handful of reasons to sign up. First off, of course, is simply that gas prices have been rather volatile in recent years: "At least 4 times in the past 15 years, national gas prices have increased by between $0.50 and $1.10/gallon in as fast as 3 months."
It also points out, correctly, that many airlines and other businesses -- for example, Southwest Airlinesand FedEx-- already hedge at least some of their fuel costs via contracts that lock in prices. (In fact, the LoveMyGasPrice company itself is engaging in hedging in order to offer lower prices when prices rise.)
How does it work?The company has two plans for regular fuel, and two for those who require diesel fuel. For each, there's a 20-gallon-per-month plan and a 50-gallon-per-month plan. When I checked in late July, both charged $3.99 per month for the 20-gallon plan and $9.49 per month for the 50-gallon plan, with the regular fuel plan capping fuel costs at $2.75 per gallon, and the diesel plan capping it at $3.10 per gallon.
So, if you buy the 20-gallon plan for regular fuel, you'll pay $3.99 per month -- which amounts to $47.88 per year (the 50-gallon plan costs $113.88). As long as you remain a member (and you can quit any time), you'll get cash back for any fuel price you pay over the next 12 months above $2.75 per gallon, up to 20 gallons per month. If gas goes up to $4 per gallon, you'll get $1.25 per gallon back. The company measures your cost of fuel by looking at average rates in the region where you live, and the cap level is subject to change and can be different in different states.
Why not buy?Clearly, this can be a great deal in an environment of high or rising gas prices. It's not entirely a no-brainer decision, though. After all, gas prices recently averaged$2.71 nationwide, according to AAA's fuelgaugereport.com. If prices remain on the low side like this, you'll be forking over $3.99 per month with no return. The catch is simply that no one knows where gas prices will be in the coming months and years.
You can inform your decision by combining your gas-price-movement expectations with a little math. If you pay $3.99 to protect the price of 20 gallons for a month, that amounts to $0.20 per gallon. So, if gas prices are $2.95 per gallon, you'll break even, and if they're above that, you'll be saving money. With the 50-gallon plans, prices would have to rise $0.19 above the threshold for you to break even.
AlternativesKeep in mind that there are other good responses to the threat of rising gas prices -- ones you can employ along with or instead of hedging your fuel costs. For example, you might buy a more fuel-efficient vehicle. If you switch from a car that averages 17 miles per gallon to one that averages 34 miles per gallon, you can cut your fuel costs in half! If you drive less, perhaps in part by carpooling, you can also save a lot. Keeping your tires properly inflated and your car from being too weighed down is also helpful.
You can also save by choosing your filling stations carefully, favoring those with lower prices. And on top of that, credit cards tied to a certain brand of gas along with some more general cards will offer you a significant discount on your gas purchases, such as 5% or more off of each gallon.
There are even some alternative hedging services, such as MyGallons.com, where you can pre-purchase gas online, locking in prices.
No matter how you go about it, you can do a lot to control your fuel costs.
The article Protect Yourself From Gas Prices Rising -- With Insurance! originally appeared on Fool.com.
Longtime Fool specialistSelena Maranjian, whom you can follow on Twitter,has no position in any stocks mentioned. The Motley Fool recommends FedEx. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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