Pre-paid gas for everyday drivers
A Miami-based company is offering the chance to pre-buy gasoline at the current price and fill up later when prices -- presumably -- are higher.
Sun, Jun. 29, 2008
By ROCHELLE BRODER-SINGER
Special to The Miami Herald
Gas prices seem destined to keep rising, and many consumers feel powerless to do anything to protect themselves from what they perceive as the inevitable.
Now a new Miami-based company, MyGallons, is offering what it hopes will be a solution: the chance to pre-buy gasoline at the current price and fill up later when prices -- presumably -- are higher.
It even offers bonuses for those who bargain-hunt for the cheapest gas.
While a few small, regional gas chains offer similar programs, MyGallons is rolling out its program nationwide, and its users can buy gas at around 95 percent of gas stations.
MyGallons customers sign up for an annual membership, which costs between $29.95 and $39.95, on the company's website, mygallons.com. The site went live to the public last Tuesday, after almost three months of testing with about 40 members.
MyGallons members receive cards that look and function much like debit cards. Once customers buy as many gallons of gas as they wish at a given price, they can redeem them when the price goes up -- six months, a year or even more from their purchase date. The company has no time limit on redemptions.
''Basically, if you pre-purchased fuel for $3 a gallon from us a year ago and redeem today at $4 a gallon, you save a dollar at the pump. We lost a dollar, but we make it up with the hedging positions we set a year ago,'' said Steven Verona, MyGallons founder.
Think of it as buying a large quantity of gas that's held and delivered in small amounts as customers need it.
Text messages or e-mails alert MyGallons members to the daily prevailing gas price for their area, helping them not only to decide whether the time is right to redeem pre-paid gas but also whether it's a good time to load their account up with more gas if the price dips.
If a member redeems gallons at a price more than 10 cents above the rate for their geographic area -- at a really expensive station, a marina or in a more expensive state, for example -- the account is charged the difference, converted into gallons.
If the price is more than 10 cents less, then the account gets a credit. Accounts will be debited or credited, too, if there are changes in gas taxes, a factor Verona says MyGallons simply cannot plan for.
Verona, 39, started work on the company 2 ? years ago, wondering if it would be possible for consumers to protect themselves from rising fuel prices as airlines and other large fuel users do through hedging, buying gas futures and other financial moves.
''I just didn't understand why individuals didn't have that same opportunity,'' he said.
Verona said most pilot program members have made at least one, and often multiple gas pre-purchases, with an average savings of 38 cents a gallon. Many purchase 100 gallons at a time.
But there is no guarantee that gas prices will continue to rise. The United States Department of Energy predicts gas prices will actually fall from the third to the fourth quarters of this year, although it predicts a 3.7 percent rise from 2008 to 2009.
If gas prices fall and remain low, members will be stuck with more expensive gas. They are allowed to cash in their pre-paid gallons, but at the lower price if the cost of gas dips.
There may be other risks, too.
''If the company takes your money and doesn't deliver the gasoline, then you're out of luck,'' cautioned Scott Burns, a Santa Fe, N.M. based financial advisor.
But Verona said members are protected. The funds they use to pre-buy gas are put into an escrow account, which is used to pay for the gas when they redeem it. He said that in the ''unlikely event'' of a MyGallons bankruptcy, they would receive their funds back from the escrow account.
''With that caveat stated, it's probably a pretty good use of money,'' said Burns, co-author of Spend 'Til the End: The Revolutionary Guide to Raising Your Living Standard -- Today and When you Retire and chief investment strategist for online financial advisory AssetBuilder.
''Basically, you're betting that gasoline prices are going to rise faster than interest will accrue on savings,'' he said, pointing out that the most a certificate of deposit might currently earn is around 4 percent. ``It's not that big a gamble because I don't think we're going to see a plummet in gasoline prices.''
He compared pre-buying gas to filling a really big pantry with several months' worth of food. Even if prices don't go up significantly, you'll still use the gasoline, and any extra you've paid will be negligible.
But Carl Steidtmann, Denver-based chief economist for Deloitte Research, said if people pre-buy gas with credit cards that they don't pay off monthly, the interest they pay on their cards could make it a poor purchase.
''You would be better off putting that money in a savings account or an IRA or a 401(k),'' he said.
Steidtmann added that ''by no means'' is it certain that gas price will continue to rise, pointing to reductions in demand spurred by higher prices and lower subsidies in nations such as China and India.
While Verona does believe gas prices will keep rising, even he admits ``there are more efficient ways to protect yourself from the rising price of gas, but it's so complicated the average consumer couldn't take advantage of it.''
He also hopes to tap into what he sees as Americans' emotional relationship with gas purchases.
''They look for bargains, they look for lower prices,'' he said. ``Part of it is to save money and part of it is they feel they're being ripped off.''
Verona expects MyGallons to be profitable within the first year. His formula for making money is from membership fees and through advertising placed on the MyGallons site and in e-mails and text messages to members.
A former consultant for technology companies, Verona has been trading commodities and currencies since he was 13.
He is using hedging strategies to make sure MyGallons doesn't lose money on the difference between what its members pay for gas and what it has to pay for the gas in the future. Less than 10 percent of the value of the escrow account is held as margin for hedging purposes.
For small retailers, the MyGallons cards could be a bright spot. The fees the retailers pay the Voyager Network, the company that processes MyGallons' transactions, are far less than the fees they pay credit card networks such as Visa and MasterCard.
Verona plans to start advertising MyGallons in mid-July in just a few cities. If membership grows too fast, he said, he might shut down registrations to make sure the company can handle the volume.
