Someone out there believes that gas prices are going to fall, or at least not rise very much in the future, and Chrysler seems to believe them. The company is currently offering to pay the difference between $2.99 and whatever the current cost of gasoline is, if you get one of their vehicles.
This is interesting, and there’s been a fair amount of discussion about it online. But I haven’t seen anyone point out that this means that Pricelock/Chrysler are basically shorting gasoline over the next three years. Pricelock’s website focuses mainly on the volatility of gas prices, but this really doesn’t make sense for a three year timeframe. Pricelock could change the guaranteed price every year, or every six months, and still provide a huge buffer against changing gas prices at far less obvious risk to themselves. So, what’s going on here, given that I’ve even heard some people swearing that $10/gal gas is right around the corner?
First of all, an overview of shorting. Let’s say that I’m really sure that Nintendo and Sony are going to drive the XBox line into the ground, mini Linux-run PCs like the Asus EEE are the wave of the future, and Google’s support of the ODF format and its Google Docs platform means that Office will optional software for businesses in the future. Basically, suppose I think Microsoft is doomed. I can short MSFT today at about $29.99 – basically making a promise to buy shares at some point in the future and getting the market price per share today. Let’s say I do this for 1000 shares. Disregarding brokerage fees, if the stock becomes completely worthless, I’ve just made $29,990. If the price falls to $10 (maybe only two of my three predications came true) then I’ve made $19,990 after I spend $10,000 to keep my promise to buy shares.
But, suppose instead that Linux is proven to cause cancer, Nintendo and Sony both bow out of the console market, and Google pulls the plug on Docs, and the price of MSFT increases dramatically, to $200 a share. When I make good on my promise to buy 1000 shares, I’ll be out an uncool $170,010! People often say that shorting has “unlimited risk.” This is not literally true (it’s just plain silly to think that the market capitalization of any stock could exceed the U.S. GDP, and lots of barriers will be encountered well before that point), but shorting anything is risky.
Now, look at the $2.99 “Let’s Refuel America” deal from Pricelock. It’s short-selling, but the target is gasoline instead of the common stock of a company. Even (especially) if you consider the profit from selling the car itself, it’s still shorting, just at a higher effective price than $2.99 per gallon.
Someone is making a huge gamble here. Pricelock, the company, could hardly be more opaque. Their website seems to have been run by a domain-squatter until late last year. Here’s my guess: this company was specifically created just to make this gamble. But regardless of who’s inside Pricelock, Chrysler would not play along if it thought that they weren’t able to make good on their promise. This means either insanely deep pockets to the extent that Chrysler is sure everything will turn out O.K. no matter how high gas prices get, or Chrysler has determined that gas prices are not really going to rise that much, that fast.
Who has the best information on the demand for gas in America for the next three years? Who has “inside information”? You can make good guesses based on trends and demographics and do fairly well, but only automakers can take this and also consider inside information on the availability of super-fuel efficient cars and cars that run on alternative fuels.
So, here’s Chrysler, signaling something about what it thinks fuel prices will be. I wouldn’t necessarily bet with them — the auto industry has made plenty of boneheaded decisions in its time. But, you’d be a fool to bet against them.
