Pre-Paid Gas Might Splash Back in Your Face
By Jeffrey Strain | MainStreet.com
Getting gas in the future at today’s prices might sound appealing, but it comes with a number of pitfalls.
With the ever-increasing price at the pumps, people continue to look for ways to reduce the cost of gas in any way that they can. This has lead to the recent launch of a company called MyGallons where you can buy gasoline at today’s prices and fill up your vehicle with it months down the road — even if gas prices have substantially increased.
The concept is pretty straightforward. Pay a yearly membership fee and you can purchase gasoline at today’s prices. The number of gallons you purchase are loaded onto a card that functions like a debit card. This card can be used at any time to redeem the gas you purchased at approximately 95% of all gas stations in the U.S., even if the price of gas has increased from when you purchased it.
On the surface, it seems like a great idea. Who wouldn’t want to pay today’s prices if gas is going to cost more next week, month or year? The reality, however, is that most people are likely to do no better than break even — and, in doing so, will carry a lot of risk.
Here are some of the issues that need to be considered before signing up:
Amount Purchased
The biggest problem is that in order for this to work in your favor, you need to pre-purchase a large amount of gas.
If you purchase only 25 gallons, you’re likely to use that all up within a couple of weeks from your purchase date. Gas prices may increase some during this time frame, but not a lot.
If you buy small amounts, you are always going to be paying close to the current price for gas and not getting the huge savings imagined.
To make this work, you need to purchase a large number of gallons (several hundred gallons of gas or more) to have a chance of making the gamble work in your favor.
Payment Method
If you decide to purchase a year’s worth of gas, you drive 12,000 miles a year and your vehicle gets 20 m.p.g., you would need to purchase 600 gallons of gas. At the current national average of $4.10 per gallon, you would need to pay nearly $2,500.
Many people don’t have access to that much cash, and would therefore need to place the payment on their credit card. If the credit card isn’t paid off in full right away, any savings that you would gain with gas price increases will likely be eaten away by the interest you must pay on the pre-purchased gas.
The overall 3.7% increase in gas prices predicted from 2008 to 2009 by the United States Department of Energy doesn’t come close to recouping the 20% interest rate on your credit card.
You can get better gas prices yourself — Mygallons charges you a typical price for your area under the program. The result is that you will likely be purchasing gas at a higher price than you could get on your own, especially if you use low gas price search Web sites like gasbuddy.
When you pre-purchase your gas, your not getting the best price for gas at that time. If you must pay $4 a gallon through the program, but you could get gas at a local station for $3.91, you would already be losing nine cents for every gallon you purchase.
Fees
You must also factor in the costs of the program when calculating if you will actually save money. The program comes with a host of fees, including a $29.95 to $39.95 initial sign-up fee.
There’s a transaction fee every time you purchase more gallons, plus penalty fees if you accidentally pump more gallons than you have in your account. Fees may also be implemented if you use a different grade of gas or fill up at a station that has prices that are higher than typical in your area.
All these fees add up and they have to be covered in the gas price increases if you are going to come out ahead.
Prices Don’t Always Go Up
The assumption is that gas prices are going to go higher because that is the current trend, but there is no guarantee that they will always go up. This is especially true over a long period of time. If the price of gas falls, you have pre-purchased more expensive gas and have to continue to pay the higher price while those around you pay the going rate.
While nobody knows what gas prices will do, the U.S. Department of Energy is actually predicting gas prices will decrease during the third to the fourth quarters of this year.
You Lose Interest
If you purchase $2,500 worth of gas, that money won’t be earning interest in an investment account. Therefore, the price of gas doesn’t only have to beat the difference between what you could have purchased it for at the lowest cost station in your area compared to the price the program charges plus all the program fees added in, but also whatever interest percentage you could have earned on the money had you no made the large gas pre-purchase.
Still Working Out Issues
Mygallons just came out of Beta testing the concept with 40 members over a period of a few months. They immediately ran into problems with the fuel card service provider they had contracted with who backed out on them. Mygallons is negotiating with other payment networks to get the program working again.
It’s possible there will be more bugs and problems along the way that could cause issues for you getting the gas that you paid for when you need it.
In the end, the risks of pre-purchasing gas far outweigh the potential benefit for most people. You would probably save more money by incorporating basic gas-saving tips into your normal driving habits and purchasing a more fuel-efficient car the next time you are in the market.
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July 15th, 2008 at 5:13 pm
While that is an interesting concept, after reading your analysis, I agree that it doesn’t sound like a great deal. While the experts keep saying gas prices won’t go down, they very well could stay at this exact point for a long time. That would make the membership fee and any possible interest a pointless loss of money. I don’t think too many people could afford to buy much gas that far ahead of time, either — people are struggling hard enough just to fill up one tank’s worth of gas. Nice idea but I can’t see it really working at this point.