Fix the cost of your petrol!

Motoring and Travel

05 February 2010 | 19 Comments

Stop spikes in the price of oil from hiking up the price you pay for your car fuel.

Many large businesses protect against big spikes in fuel costs through a process called 'hedging'. Through some complex products, for an agreed fee, they can effectively cap the price they pay on an agreed amount of fuel at some point in the future.

Now, we consumers can also manage the risks of fuel-price fluctuations using the services of a new site called Fuelbeater.com. For a fee, it will take some of the edge off big jumps in the price we pay at the pumps.

What Fuelbeater does

Fuelbeater's product is designed with the intention of protecting you against spikes in the price of crude oil, of refining costs and of the profit made by the oil company; for example, if you pay £1.11 per litre for diesel, roughly 34p of that is the price of the dark liquid itself, and it is this element that Fuelbeater helps with.

What Fuelbeater doesn't do

Fuelbeater doesn't protect you against rising fuel taxes nor does it protect you if a petrol station decides to increase the cost of its fuel to make a larger profit.

It doesn't work like this: you can't say 'I've fixed at £1.11 per litre, I just paid £1.20 per litre to fill up, so I'll claim the extra 9p per litre back from Fuelbeater'. It's not so straightforward...

How it works

Let's say that you estimate you use 300 litres per month. Currently, Fuelbeater says the price of the fuel is 34p (although we pay about £1.11 for diesel after taxes and petrol station profits). Today, Fuelbeater will charge you 3.2p per litre (or £9.60 per month) to protect 300 litres from increased fuel costs.

Let's say the price of the oil rises during the month, spikes from 34p to 60p (which would probably push the cost at the pumps to about £1.35-£1.40) and then it comes down again to 40p (about £1.15-£1.20). Fuelbeater calculates the average price during the month. Let's say it was 50p, so 16p more expensive. Fuelbeater will then repay you 16p for each litre you protected. With 300 litres, that's £48.

Fuelbeater won't protect you from the whole increase you face, because the 16p increase will also push up your VAT costs by about 2.8p per litre, or £8.40 in the month. When the Government increases fuel duty or VAT you also have to put up with those increases, because Fuelbeater won't protect you.

Contracts with Fuelbeater last six months and the average price is measured every month. If the average price for a given month is above the initial quote price (today that's 34p or very roughly £1.11) then Fuelbeater will credit your account with the difference.

How Fuelbeater calculates the price of oil

Fuelbeater uses the London ICE Gasoil prices as a proxy for the cost of the dark liquid. As this rises and falls, you should expect to see fuel at the pump follow it. A weakness of this measure is that it's more suitable for diesel and not designed to be so accurate for petrol. It will usually have some correlation, but at times may not reflect the increase you're paying if you use petrol.

(For those of you with knowledge of commodities trading, Fuelbeater buys ICE Gasoil futures to cover any payments to you, but if you don't know what that means it's not particularly important and its rather too technical for this piece.)

Who is this suitable for?

This sort of product is not for people who want to gamble on the direction of oil prices over the next six months, nor is it to reduce the overall amount you pay on fuel over the long term. This product is for people who need certainty only. If you have a very good reason to reduce the impact of any large spikes in fuel prices, this could be suitable for you. For many people, an emergency fund is more flexible, as it can help you cope with spikes in prices of everything, not just car fuel.

We can help you further

I suggest you read Get ready for higher petrol prices, which talks about the future of fuel prices and gives you some tips on how to reduce them.

Then, why not take up this goal: Buy a car for less and watch this video: Cut your car insurance costs?

Compare car insurance at lovemoney.com.

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