Should you or shouldn't you?

     This may be the biggest question you have regarding the upcoming heating season.  The truth is no one knows what is best.  Anyone who tells you that you should pre-buy oil, lock in a price, or cap a price because it is in your best interest is blatantly lying to you or is a complete fool.  There is absolutely no way to determine what will happen to the price of oil in the future.  So many factors contribute to the supply and demand chain that it is impossible to predict.  If I, or anyone else knew what would happen with oil prices, then I would not be delivering it. 

     What can be said factually is that cap prices and lock-in prices have historically not been in your best financial interests.   On the flip side,  3 of the past 4 years they would have been in your best interest.  My analogy is like comparing the price protection plans to the stock market,  during any given year you may gain or lose, but over time you will gain.  I am not sure if we should look at history over 20 years or history over 4 years.

     Global economies,  world-wide climate patterns, political influences as well as volume of oil produced, refinery output, and shipment of the products all play major roles in the pricing of oil.  Today the single biggest influence in the oil prices is the supply and demand chain.  The world oil consumption is equal to the world oil production.  At any moment, any one thing that disrupts this balance sends the market up and down.  There are no "cushions" in the market.  OPEC has lost their control in pricing.  In the past OPEC could have swung markets by overproducing or under producing.  For instance,  last fall hurricane Ivan was responsible for about a 25 cent increase in every gallon of oil.  The reason is that the world market could not rebound from the shut-in production of gulf coast oil producing rigs.  As I write this,  it is refineries that have contributed to a 18 cent increase in the past week.  Investors are concerned because refineries are at 96 percent maximum production.  The concern is if they have any problems then they may not be able to supply enough products. 

      I hope I have given enough information to confuse you.  The market is confusing and understanding it is impossible.  Now I will give my own personal views on what you may want to do.  I have stated and will state again that I do not know what will happen this heating season.  I have my opinions on what may happen.  You should always do what you feel is best for you.  If locking-in gives you a sense of security and it will not hurt your budget dramatically, then it may be the right decision even if it was financially worse.  If you just want to ride the market the just go with it.  The only tool you have right now is your perception of the future.  If your gut tells you to go one way or another, you should listen to it.  You need to make the best decision you can given the knowledge you have.  With that, you can not be blamed for making the wrong decision.  It may work out worse, but it was not wrong.

    With any price protection plan, you need to weigh the risks vs. the rewards.  At this moment, 6/5/05, I do not feel they are worth it.  The risks are too high for the rewards.  Currently,  I am hearing of price caps of $1.89 and up.  Probably higher now given that oil has gone up 18 cents recently.  That is an awfully high price to lock-in or cap at.  Also remember that most price cap programs will cost you money to enroll.  Let's say an oil company charges $49 to enroll in a program and will lock you in at $1.99.  If you divide $49 by 600-700 gallons which is what an average consumer will use during the heating season, then you are paying 7-8 cents per gallon fee on top of your $1.99.  At this point you are only protecting yourself against oil that costs more than $2.07.  That is for all season long.  You may argue that if the price of oil drops in a price cap program then you are protected.  However, if the price drops you would most certainly be better off if you were not committed by contract for a couple of reasons.  One is that oil companies that set your cap price are the ones who will dictate the price of oil.  If the market drops then that means they pre-bought oil high.  They will be more reluctant to drop their price of oil, especially if they did not pre-sell enough oil.  Second, the price cap quote you get is already inflated to what you would normally pay as a mark-up.  Meaning if I was to charge  $1.50 per gallon today, I would charge $1.58-1.65 for the same oil as a cap.  This is due to the insurance protection built into the price of oil as well as an added mark-up for offering the cap prices. 

     I think it is reasonably certain that oil prices will be high this upcoming year.  You will not be getting oil for $1 a gallon anytime soon.  However, the experts and analysts have set the futures market to where it is for reasons.  If all goes according to plan then the future price will be exactly where it was predicted to be.  The problems and concerns with production and refineries is already built into the future price.  The question is what will really happen between now and then that will influence oil prices.   Until the price drops, I will not recommend price protection plans nor buy into them.  If and when the market changes to what I consider a more favorable one then I will buy.

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