Sunday, December 02, 2007

Oil Cost Averaging

As posted on

As of the writing of this article the price of oil has dropped from almost $100 to about $88 in one week. There is still plenty of uncertainty in the market, however, and counting for wars, attacks, natural disasters, and just standard complications in getting enough oil from the pumps to the refineries to the gas stations to your car, we can say that the one certainty is uncertainty. Prices will fluctuate, we just do not know when, by how much or in which direction. So this begs the question: Do these circumstances have any opportunity for saving money? As a matter of fact, they might.

For those of you who have invested in stock for a while (or have seen Boiler Room one too many times), Dollar Cost Averaging might be a familiar term. For most of us it is not. Dollar Cost Averaging is an investing strategy, attractive because it can maximize revenue but can be applied very passively over time. The general idea is that you invest a set amount, say $100, every month in a certain stock (or group of stocks, or fund, etc). If the stock is cheap, say $20 per share, you will be buying 5 shares, but if it climbs up to $25 per share, and therefore is more expensive, you will only be buying 4 shares. This means you will be buying more of the stock when it is cheap and less of it when it is more expensive.

How do we apply this to gas (or petrol if you’re in Britain)? One way would be to establish a certain amount. For example, when gas was at its cheapest point this year, I could fill the gas tank in my car for about $25. Price has been fluctuating a great deal in the meantime, so at times it could cost me close to $40 to fill up my tank. On the other hand, I realized that no matter what the price was when I filled up the tank, a day or two later it would usually be quite different.

So if I choose to constantly spend $25, I know at best I will be able to fill the tank. But when gas is more expensive, I will be buying less of it and if it then becomes cheaper, I will buy more. Applied in the long term, therefore, this simple and passive method should allow me to maximize the amount of gas I buy at lower prices, while minimizing the amount I buy at higher prices. This can be a handy way of averaging out your cost of gas.