A Smarter Way to Purchase Natural Gas: Dollar-Cost Averaging
When fueling a car, most people fall into one of two categories: You either pump until the tank is full, or you elect to buy just a portion of gas — say $5 worth — at a time.
This type of purchasing decision is also available to companies that buy natural gas. You could, for example, buy natural gas to fuel your business for two full years at a single point in time, all at once. Alternatively, you could make purchases in small increments, similar to the person who buys a few dollars’ worth of gas each time. Using this method, you could buy natural gas in smaller, fixed amounts over time — but not simply to save a few bucks here and there. Companies that use this method can better avoid price fluctuations.
To revisit our original scenario: Is it better to buy 10 gallons of gas for your car all at once? Or, would you rather buy five gallons today for $5, and then another five gallons next week, when the rate could be slightly lower? In this scenario, the savings of the latter approach might be modest. But when you’re talking about the amount of natural gas it takes to fuel an entire company, the benefit can be significant.
A New Way to Think About Purchasing
In this simplified scenario, we’re talking about dollar-cost averaging (DCA). DCA, a common investment strategy, allows you to buy a fixed dollar amount of an investment on a regular schedule, regardless of the share price. When prices are low, that fixed dollar amount buys you more shares; when prices are high, it buys less. Rather than investing a lump sum, you invest over time — which can help reduce long-term risk.
This strategy can also be used to purchase natural gas, one of the biggest expenses for just about every company.
The price of natural gas goes up and down. It does so regularly, quickly and sometimes significantly. In 2016, the average monthly price for commercial consumers per thousand cubic feet fluctuated in the following manner[1]:
- January-February: Up 1%
- February-March: Up 3%
- March-April: Down about 2%
- April-May: Up about 6%
- May-June: Up about 5%
- June-July: Up about 5%
- July-August: Up about 2%
- August-September: Up less than 1%
- September-October: Down 9%
- October-November: Down 4%
- November-December: Down about 5%
What are the implications of this? If you went to the gas pump when prices were highest and bought all your gas for the coming year, you’d have spent 10 percent more than if you’d purchased using the dollar-cost averaging approach.
Just Like Investing
The way you purchase natural gas can — and almost certainly should — look similar to the way an investor buys stocks, mutual funds and bonds: You go to market regularly with a fixed amount of money to spend. When prices are low, you procure more; when they are high, you procure less.
Slow and steady does more than win the race — it helps reduce the risk of trying to time the market. Yes, it would be great to complete all of your shopping when prices are low. But no one — not even the best investor — can pull this off consistently.
To achieve long-term stability and manage price volatility, the better strategy is to purchase natural gas using that DCA-type approach. With this kind of strategic energy management plan, you can improve budget certainty.
It’s easy to see the benefits of dollar-cost averaging, but it’s not always easy to implement within your organization. If you have questions about purchasing natural gas for your business, contact us.
