Tuesday, July 5, 2011

Today's Lesson in Practical Economics

In today's mail is a four color flyer from my LP gas company telling me to "LOCK-IN YOUR PROPANE PRICE NOW and secure your propane cost for the heating season!"  They have a couple of different plans, but, "You must sign up by Aug. 12, 2011."

Wow!  I am so pleased that my propane supplier is looking out for my interests!  Do you think they sent this out because they expect the price of LP gas to rise after August 12?  Or is it more likely that they are expecting the price to drop? 


  1. I know that when we had fuel oil heat we used to buy it all during the summer because the additional demand in the winter meant that the spot price rose significantly, usually 25-50% when corrected for fluctuations in the base oil cost. My neighbor here has LP gas tells me the same thing happens around here.

    You might check your local prices since there does tend to be significant seasonal variation in price based on demand.

  2. The driver who came out to fill our tank in early spring suggested that we should only put in some, that prices in summer would probably be lower. As a result, we pumped 300 gallons at the time. I suspect that after August 12, the price will fall, and we'll fill up then.

  3. They may sincerely be trying to be helpful--but at this point, they are offering "futures"--which basically means that, ultimately, the price will be predictable.

    We got a suggestion from the natural gas company to "average" the cost of gas over the year, so that we'd get a nice constant monthly payment, adjusted about twice a year.

    The funny thing is, though, in the first apartment my wife and I lived in, our hot water heater rusted out...and we didn't discover it until we got a HUGE gas bill. I can't help but wonder what would have happened had the gas company averaged things out instead...

  4. They may be expecting the price to drop. They may also be trying to place as large a future order as they safely can (and save some money thereby), by getting their customers to commit to the current price.

  5. As Epsilon says, they might well be trying to help you out honestly ... and benefiting themselves from getting a confirmed contract from you, so you won't be shopping around with another company.

    (Or perhaps they want you to pre-pay some, or average the payments out, which might get them extra income they could use NOW, rather then in 5 or 6 months...)

    It need not be zero-sum, after all - both parties can benefit!

  6. I would add that the Futures market is extremely volatile, and so they are a stupid thing to trade in; where they shine, however, is in trade between producers and consumers.

    A farmer, for example, will sign a Futures contract that says he'll sell his crop for $X when his crop is harvested, to a cereal company. At the time the crop is harvested, the price might exceed $X--perhaps by a huge margin--and so the cereal company would "benefit" by getting the cheaper price. On the other hand, wheat prices might be much lower than $X, so the farmer might benefit instead.

    Since both the farmer and the cereal maker value predictability over perceived "benefits", though, both are served well with a Futures contract.

    As I realized with the natural gas issue, though, things like this "abstracts" the price, so if something bad happens (like a leaky water heater) I might find a huge jump in my "average" cost after three months of leaking, when the price is re-adjusted, instead of finding the problem after one huge natural gas bill.