Tuesday, November 11, 2008


Buying fuel-oil futures

A few months ago, when the price of gasoline was over $4/gallon[1] and rising, heating oil prices were also going way up, and people were worried about whether they’d be able to afford not to freeze this winter. Some of the heating-oil companies gave their customers an option: sign a contract to buy your oil from us, and we’ll fix the price so you don’t have to worry about increases over the coming winter months. Lots of customers took them up on the offer. Peace of mind, they thought.

The thing is, though, that prices have since dropped — dramatically — and the customers who signed those contracts now wish they hadn’t:

Barbara Daley, who is 76 and lives on Long Island, signed up in September at $4.22 a gallon. Now, with prices around $3.10, she is looking for a little sympathy. Mrs. Daley said her heating oil company, which she did not want to antagonize by naming, told her it would cost $599 to terminate the contract — about what she paid to fill up her 250-gallon tank one time last winter.

“They said it might go up to $6, so I locked in a fixed price,” Mrs. Daley said. “I’ve been with this company 30, 35 years. You would think you would get some consideration. I’m not asking for the world.”

No, Mrs Daley, you’re not asking for the world. You made a bet, and you’re asking for them to give you your bet back. It doesn’t work that way.

You were perfectly happy to sign up to buy oil from them at a price far below market value, possibly far below their wholesale cost. Would you be giving them sympathy and paying them extra, if instead the price were now up to $6 a gallon and they were losing money on your contract? No, I guess you wouldn’t.

Basically, you invested in a commodities market. You bought fuel-oil futures, betting that the price would go up. It didn’t. It’s too bad, but there it is. The company is offering you a way to limit your losses to $599. Deciding whether to take that offer or not is another gamble — with the current price differential, you’d have to buy about 535 gallons before you’d spend enough to make it worth paying their price to get out of the contract. Of course, if the price goes down more — or up again — that will vary.

Politicians are asking oil companies to reconsider. But why should they? When you gamble, there’s a risk. And if they give Mrs Daley and the others a break on their contracts, they’ll most likely have to make it up by distributing the cost to their other customers, who hadn’t signed contracts. That’s not fair to those customers.

[1] Yes, yes... I know that we’re a bunch of whiners who are paying a third to a quarter of what the rest of the world is paying, and yet we’re complaining the loudest. Don’t go there.


Laurie said...

I completely agree with you. Unfortunately, with all the litigation in this country, it often does work that way. However, I would like to know who the "they" were who told her it might go up to $6. If it was the oil company, she might have a case, because they frightened her into the contract.

By the way, I've tagged you with a meme over on my blog...Sorry

Benny said...

In Germany, Berlin's senator of finance Sarrazin advised people who cannot afford the increased heating cost to consider "wearing a thick sweater and live with just 15-16°C" (59-60°F).
Well, he received the first "Berlin prize for discrimination" for that comment...