Why can't consumers buy fuel futures?

The average american family consumed about 4% to 6% of pre-tax income on gasoline, which probably means about 7% to 10% of after tax income. After you factor in mortgage payments, insurance copayments and other fixed expenses, I'm guessing that a lot of families give their local gas station about a fifth of their monthly cash in hand. Given that in the short run consumers are stuck with the car, workplace and home that they have, short run price elasticity of gasoline is famously low, or around -0.25 (for non-economists: that means a 10% increase in gas prices reduces consumption by only 2.5%). As the graph above shows, between 2002 and 2008, increases in the price of gasoline ate over  $1,500 from the budget of the average US family. Gasoline price volatility is thus a major source of risk to the finances of US families.

It is therefore surprising that a prudent consumer in the US (or in any other country I'm aware of) has essentially no ability to protect himself from the risk of future high gasoline prices. This is all the more surprising considering that that the Chicago Mercantile Exchange quotes future prices for gasoline contracts with maturities up to three and a half years from now. Presumably it would be technically feasible for a company to buy contracts for all maturities up to February 2019, split them off into 25 gallons per month cards, and sell them at gas stations or car dealerships. If consumers didn't want to fork out the cash in advance, they could do the same with options (and buy a card that allows you to buy up to 25 gallons of gasoline at a fixed price). Why doesn't this happen? Are there regulatory constraints?




Comments

  1. Refinery AutomationSeptember 24, 2018 at 11:29 AM

    Nice content. I am extremely impressed with the information you have mention in this blog. Keep writing. sulfur scrubber

    ReplyDelete

Post a Comment

Popular posts from this blog

Why do bands allow scalpers? (Hint: Dynamic Efficiency)

Mankiw recently posted about ticket prices and scalpers, and this reminded me that a while ago I thought of a reason why performers might allow some people to make so much money in their stead. It works more for music groups and football teams, but is more relevant for theater performances. Say you are a music band who has just had a string of hits. You have two options: sell concert tickets for $60, in which case about half of them will go to lucky fans who have been following you since yours early days, and half will go to scalpers who will resell them for $500 to wall street traders that will use them to impress their dates. Or you can sell all of them for $400, and they will all go to wall street types. It seems a no brainer, but what happens if the next album flops? In the first case, the guys that followed the band from the garage days will still go to the concerts to hear the old songs, and maybe your next effort has a better reception. Even if you never have another hit,...
Read more

What Genghis Khan, but Elizabeth Can't

One of my ongoing research projects is on the Mongol invasions. Doing some background research, I realized there's an interesting asymmetry between male and female rulers, in terms of available imperial sexual strategies. Say that the Mongol hordes have just finished annexing another city along their ever expanding frontier. Let's call it Elbonia . In this case the local elite had the good sense to surrender peacefully, and accept the Mongols as their rightful overlords. Everybody knew that if they put up a fight, the Mongols would typically exterminate a significant proportion of the local population, and enslave the rest. What did the Mongols want from Elbonia? Well first of all, obviously they didn't want the inhabitants to ever attack their other dominions, regardless of any preexisting local feuds which may have existed. Secondly, they wanted them to send them money or tradable goods regularly. And thirdly, they wanted them to furnish soldiers for use in their next...
Read more

Was any other car company gaming emission standards?

Image
As most of you already know, Volkswagen was recently caught cheating on emission tests. But were they really alone in doing so? The EPA data shows some suspicious patterns. Without getting too technical (in any case, the specifics are still unclear), there's a tradeoff between fuel efficiency, and NOx emissions. So for a given level of performance, the software that controls a modern diesel engine can be tuned so that it is more fuel efficient, but produces more NOx, or it can be tuned so that it is less fuel efficient, but produces less NOx. Since Volkswagen had problems meeting the NOx standards in the US, they decided to introduce software that detected when an emission test was being performed, and tuned the engine so as to decrease NOx production, in the process potentially worsening fuel economy relative to regular driving conditions. One possible outcome of this procedure is that the cars involved might actually have better fuel economy in real life conditions, tha...
Read more