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MyGallons.com: Profiteering off the frenzied fear of the weekly fillup July 4, 2008

Posted by The Armchair Economist in Commentary.
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Recently, I’ve been reading countless stories about consumers making ridiculous financial decisions to trade their SUVs for something more fuel efficient, anything ranging from a Smart car to a motorcycle.  The sad part is that for many of these people, they are upside down on their SUV (ie: they owe more on the SUV than the car is worth) so they are paying HIGHLY inflated prices for the gas sipper they are trading into (I’ve heard loans of 39k for a 27k Prius!)  Insane, but this isn’t normally enough to get me to post, but today I came across an article by Kimberly Palmer, of the Alpha Consumer blog on a company called MyGallons.com.

The premise of this company is that you can buy gas at today’s price and use it later, when gas prices increase even more.  Sounds good right?  (if you have any kind of training in finance you probably already see the faults).  The fine print includes: Annual Fee of: $29.95, ($39.95 if you don’t want to give them permission to automatically deduct from your credit card), a $1.95 ‘fill up’ fee if you use a credit card (the only accepted payment method), in addition to other fees (ie: an overdraft fee).  I’ll leave it to you to do some back of the envelope math to see how much ‘savings’ you need to negate the transaction costs.

So what happens if the price of gas goes DOWN?  The FAQ helpfully states: Gas prices move up and down all the time. If prices drop you can wait for them to go back up in the days or weeks ahead.

What happens if I want to cash out on my unused gallons?  The FAQ further elaborates: If you want your money back for unused pre-purchased gallons, you can request a refund for the amount you paid for your unused gallons or your MyGallons price at the time of the request, whichever is less.

Are you kidding? So after the biggest run up in oil prices in HISTORY, you will allow me to PAY for the privilege of being the bag holder?

Essentially, what MyGallons.com is doing is providing a consumer level futures market for gasoline.  The Futures market allows investors to hedge their investments on various commodities so their future expenditures can be more predictable.  This is one way that Southwest is still paying something like $53/bbl of oil even though the spot price is in the $140’s (and one reason their overhead is much less than their competitors who didn’t hedge).  The flipside of this is that if oil prices are 20$ instead of $140, Southwest would be paying a higher price for oil than their competitors who didn’t hedge. For this reason, Southwest probably wouldn’t want to put all of their eggs in one basket and oil purchased via hedging only account for a fraction of their actual oil needs. With MyGallons.com’s concept, you are not hedging to lower your average cost of gas (since presumably you are buying all of your gas through this).. but you are simply BETTING that gas prices will increase in the future.

Hedging implies that you are using this to reduce the risk of a particular transaction/investment. With this business model, my assumption is that you want to protect yourself against the risk of increasing gas prices. An appropriate hedge would give you the ability to decrease the risk of increasing gas prices, and the only way this model works is if gas prices are GUARANTEED to increase forever (this is the implication the site is trying to make.. and trying to capitalize on to get your hard earned cash) if they were legit and committed to offering you at true hedge, they would offer to buy back your prepurchased gallons at the price you purchased it if it ever went down since presumably, they already own gas at the price you paid  (In reality, they give it to you at which ever is lower: the price you paid or the current spot price.. meaning they keep the profits of the risk YOU TOOK – if this happened in the world of finance, whoever architected this scheme would be likely be in jail for fraud).

Their marketing is also slick (and misleading) in that to capture the $1262 of savings outlined, you need to prepurchase 1,785 gallons of gas (which at today’s average cost of $4.10/gallon, comes to an immediate outlay of ~$7300). That $7300 is a one way bet that gas prices will increase (you have no downside protection if prices decrease). Rather than paying all of the fees and tying up a significant amount of money, your best bet is just to drive less, drive slower, and pay for gas at the pump the regular way.  By the way, $7300 spent down gradually over 12 months in a savings account earning 3% interest would earn ~$120).  For their ‘lock in price’, they chose the not so arbitrary date of Jan 29th 2008, which happens to be the lowest price of gasoline in 2008.. a date that predates their website (domain registered on March 19, 2008).

In summary, MyGallons.com is merely a company that is out to make a couple of bucks out of the fear that oil prices will go up forever (just like real estate prices were going to go up forever).

Update #1: Besides having a business model of questionable value, the BBB gave MyGallons.com a rating of F for an ‘omission of fact’  for mis-stating their relationship (it doesn’t exist) with the Voyager fleet network (a payment processing network)… so your $7300 is currently an interest free loan to MyGallons.com since you can’t use it ANYWHERE to buy gas.

Update #2: Just to clarify, the way that MyGallons.com is currently structured doesn’t seem fraudulent or illegal, financially the program is NOT in the best interest of the typical consumer.  The opportunity cost of tying up a significant amount of your money and/or the price of gasoline goes down is just too great.  Stay tuned to see how the rest of this story pans out.

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Comments»

1. Webby - July 5, 2008

Their website currently says they are searching for a new payment-processing network, as the existing network is not handling transactions for them.

2. The Armchair Economist - July 5, 2008

Yes, I believe that occurred after the BBB called them out on mistating their relationship with Voyager. This still doesn’t change the questionable value proposition to consumers who want to decrease the risk of increased gas prices.

3. draabe - July 5, 2008

A sale is a sale is a sale…and whatever gets you there –

GETS YOU THERE!

These kinds of decisions should be made carefully and honestly by consumers. If you are moved by a desire to “do something good” or “improve the environment,” that’s fine! That’s great. There’s no need to criticize anyone for that.

But, make these kinds of decisions carefully – and honestly.

4. Karen Rice - July 5, 2008

if it sounds too good to be true…..

5. economics 101 - July 6, 2008

Actually, a true hedge locks in a price to be paid at a later date whether the price goes up or down. In this case it looks like they are doing it right. If you were only protected from an upward price move, that would be an option.

6. The Armchair Economist - July 6, 2008

economics101 – I’m not sure what source you are using for your definition, but a hedge does not refer to any specific investment vehicle. It only means something that reduces or cancel the risk of something else. An option is a specific way to hedge against risk, but they aren’t mutually exclusive.

Here is the definition of hedge from investopedia and I’ll leave a little bit of homework for you to Google the definition of Options.
Hedge: Making an investment to reduce the risk of adverse price movements in an asset. A perfect hedge reduces your risk to nothing (except for the cost of the hedge).

7. jcorn - July 7, 2008

I appreciate you comment on my article and I am not only leaving your link there but I’m going to suggest people check out your site. I do want to note that my articles was written from a consumer point of view and if any skepticism did not come through, I apologize. I kept trying to note the potential downsides of this but felt that to let people know what happens to those who purchase a card, good or bad. Your article gives vital updates and I hope you continue to weigh in when I do an update on mine. I’m bookmarking your site.

8. jcrn - July 15, 2008

I updated my article and you can officially tell me you told me so 😉 I never got the card, the company got an F rating from the BBB and I got a letter in my email from the CEO Founder of the company. Updates are at the website. I am not holding my breath for the card or refund but I do wonder how many people are still hoping that things will pan out. If they do, by some miracle or quirk, I’ll be officially amazed. Again, thanks for dropping by and alerting me to your take on this.


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