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There is a saying on Wall Street

If you're not hedging, you're speculating.

On the O’Reilly factor, whenever gasoline prices go up, Bill O’Reilly goes nuts ranting and raving about, and blaming misbehavior by the oil companies and the “speculators.”

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You and Bill O’Reilly are short gasoline

As a consumer, you and Bill O’Reilly are short the things you regularly buy like gasoline. “Short” means the position you have in the appropriate market is such that you hope prices go down.

For example, you have a car and you know you need to fill its tank with gas and travel to the places you go to.

Should you put a gasoline storage tank in your back yard?

One way to protect yourself from gasoline price deflation would be to purchase a huge gasoline storage tank, bury it in your back yard, and fill it up now at today’s prices. John Denver tried to do that back during the 1970s gas lines.

Then, if gasoline prices rise, you would already have your gas that you bought at today’s lower prices. You would be protected from the increase in prices. I’m calling your bluff here, Bill O’Reilly. Stop whining and take action to stop being hurt by higher gas prices.
When it comes to precious metals, I generally favor your taking delivery of the coins or whatever and storing them in your safe deposit box. That greatly reduces counterparty risk.

Not safe or practical

With other commodities, however, like gasoline, natural gas, heating oil, and so on, that’s not feasible because of safety hazards, permit requirements, the need to install a pump to get the gasoline out of your storage tank into your car tank, and so on.

So hedge by also going long

In those cases, you may want to hedge your inflation risk by taking a countervailing long position in the futures markets. A short position—the one you are already in as a consumer—means you hope prices go down in the future. A long position is the opposite: you hope price go up in the future. You do that buying purchasing a futures contract for gasoline or natural gas or heating oil.

Big minimum contract size

As a practical matter, you would do that on margin. That is, you would put up a small “down payment” and borrow the rest of the cost. I believe they have a minimum of 1,000 barrels in the oil futures market. The minimum futures contract in gasoline, natural gas, or heating oil is probably similarly pricey—like around $70,000.

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Band of brother speculators

Are you going to buy $70,000 worth of gasoline, natural gas or heating oil in the next year or two? Most consumers are not. You might if you own a business with a fleet of vehicles or a lot of rental properties where you pay for the heat.

But if you are just a consumer, you could theoretically band together with some buddies to meet the minimum size contract. The average car drives about 12,000 to 20,000 miles a year. At, say, 23 miles per gallon, that’s 521 to 870 gallon a year which at, say, $3 a gallon would cost about $1,563 to $2,610 a year. Band together with two or three dozen others and you probably have enough for a minimum contract.

Positions offset if price moves either direction

Once you own the contract, if gasoline prices go up, your profits on the futures contract will approximately offset your pain at the pump. If the price of gas goes down, your futures contract would lose money and that pain would approximately offset the joy you will feel at the pump filling up at lower prices.

Also, if you are long and the price drops, you will have to make margin calls, that is, put up additional “down payment” money. Each member of the group must have liquid assets available to do that.

Lock in today’s price

By hedging in this manner, you essentially lock in the market price of gasoline on the day you take the long position. That means you will not be hurt financially by higher gasoline prices, nor will you be helped financially by lower ones.

You and Bill O’Reilly are gasoline speculators, specifically, you are short speculators

Until now, that’s what you and O’Reilly and all consumers have been doing. You have only been on one side of gasoline prices: short. So you made out well when they went down and you screamed like stuck pigs when they went up. You were what Bill O’Reilly denounces as a “speculator.” Indeed, he is a speculator like every other consumer—a short seller.

Instead of ranting and raving about the vast oil speculator conspiracy, O’Reilly ought to take a long position on margin and thereby stop worrying about gasoline prices. If he really wants to “help the folks,” he would advise them to do what this article says. If he does not do what this article says and advise “the folks” to do likewise, we should be forgiven for thinking he is more about bitching and accusing than helping.

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You and Bill own oil companies

Actually, he and you probably already are also long in gasoline to an extent in that you own a Total Market or S&P 500 index fund in your 401(k) or IRA and that makes you an oil company owner because oil company stocks are included in both total market (a.k.a. Wilshire 5,000) and S&P 500 index funds. Of course, the amount of gasoline you own because you own stock in oil companies is tiny and does not offset your short position as a consumer.

If you’re not hedging you’re speculating and Bill O’Reilly and the rest of the consumers are short speculators who are crybabies when the market goes against their short speculator position.

So stop speculating and start hedging—or shut up.