262ventures.com

I’m curious to see how much volume the gas bank mygallons receives and how much success they enjoy a few years down the road.

I distinctly recall standing in the lobby of building 66 in 2004 or 2005 with RDB discussing the, then unheard of, gas price of $2.75/gallon.  He had just read an article about a gas bank in the midwest which offered “gas forwards” to consumers and hedged their position on the CME.  The concept was really simple: you sell small forward contracts on oil to consumers, who do not have the capital or access to participate in oil forward contract markets, aggregate those positions and hedge them on the CME, and extract a small fee in the form of annual account fees and small premiums on gas prices.  The bank could hold its exposure to practically zero,  or could even speculate on the price of gas, while earning pure profit from the premium that the consumers pay.

I haven’t heard anything about that gas bank concept since, until today.  Gasoline has hit a price point which is causing a change in consumer behavior.  It would seem that the gas bank concept would have significant traction in today’s economy as consumers fear the upward ticking prices at the pump.  From books such as Predictably Irrational, we expect that the human brain tends to misprice the effect of recent trend.  Mygallons cleverly provides useful links to articles with titles like “$200 oil” or “$11 gas”, promoting that fear.  I would guess that there would be a lot more customers at mygallon’s website today than at the anonymous gas bank, RDB and I discussed, three years ago.

Final thought on this concept: There is no perfect gasoline hedge, only a correlated hedge through contracts on oil.  The airline industry had similar problems in hedging their costs of jet fuel.  Will this affect mygallons?

Tags: chicago mercantile exchange, forwards, gasoline, hedging

This entry was posted on Tuesday, July 1st, 2008 at 5:41 pm and is filed under Energy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.