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How to hedge your family’s oil consumption: A practical guide
Emmanuel Fruchard, Blog
Why hedge your oil bill?
Oil hedging can be considered for a range of different reasons, including:
- Sooner or later, Peak Oil is coming and I feel concern about my future lifestyle. For example how will I heat my house when heating oil prices sky rocket?
- On Futures market, oil price in Dec 2015 is lower than in Dec 2008. Isn’t buying Dec 2015 Futures a good investment?
- Low future prices are pushing decision makers to waste fossil energy resources. If more people buy Futures, price will raise and resources will be saved.
If you agree with one, or more, of these statements, then you might want to consider hedging your future oil consumption.
In this context ‘hedging’ means choosing an investment strategy that offsets the impact of oil price on expenses. In other words if oil prices move up, we pay more for a range of goods but our assets value moves up by an amount that balances the expense increase.
Who can do that?
Not anyone can take a position on energy as a financial asset class. Before you consider this strategy, please check you match the following conditions:
- Education in Economics: You have to be familiar with the basics of price moves and the risk induced on any investment
- Basic asset management practice: If you have never bought a stock share or a bond, try that before buying or selling Futures. On the other hand if you are familiar with stock and bonds orders, you will find Futures orders very similar
- Cash: Futures do not trade in small quantity. A single Future contract requires several thousand dollars of cash.
If you match these conditions and are looking for a practical guide that saves you time and errors, then the next section is directed to you.
…Who I am and why I wrote this
I have been working in the financial sector for 20 years but am now not employed by any institution involved in Futures (exchange, broker, bank or fund). Many people around asked me how I had the idea of doing such a hedge and how I did it. That’s why I wrote this memo.
Please note the following remarks:
- Disclaimer: I am not recommending any specific investment strategy, any Future exchange or any broker. If the reader chooses to open a position on a Futures market, he or she will do it for its own profit or loss and I cannot be taken as responsible for any error or loss.
- Of course I wrote this memo after I hedged my family life time oil consumption. I would seem to benefit from a surge in future oil prices, but if my hedge calculations are correct it does not make a difference whether prices move up or down (that’s the very principle of hedging).
- Hedging energy price does not mean making less effort to save our planet. The savings obtained by using less oil are the same, whether one is hedged or not.
(31 May 2007)
See the original for the full article. Normally we don’t run investment advice in Energy Bulletin. However, Emmanuel Fruchard’s article is non-commercial and provides good information. His bio is online. Since the bio was published, he has left Summit Systems, Inc.
Emmanuel (whose native language is French) writes:
I am aware it is lacking some language improvements (to put it nicely). I would be glad to improve it with some advice and publish it, but I don’t know ‘alternative’ financial journals.
-BA
Managing your risks essential for peace of mind
Bob MacDonald, The Gazette via Canada.com
I came across an interesting article in Forbes the other day by Robert Shiller, the Yale economist who predicted – some say provoked – the collapse of the tech-stock bubble in 2000 with his book Irrational Exuberance.
In 2005, Shiller added a chapter to the book, warning of a coming meltdown in the housing market in the United States.
That prediction is now coming to pass in many of the United States’ overheated cities.
In his Forbes piece, Shiller doesn’t talk about the stock market or real estate, but rather the price of crude oil.
He doesn’t take a stand on whether crude is set to spiral higher in coming years as is predicted by proponents of the peak oil theory.
Nor does he make the case for a plunge in prices, as others predict, based of demand lagging thanks to new alternative energy sources or the unwinding of speculation on oil prices.
…Shiller makes a pitch in favour of putting oil into your portfolio as insurance against rising crude prices.
The sting of soaring prices at the pump will be assuaged by the increasing value of your portfolio.
People with jobs in industries that benefit from relatively cheap oil, like autos, plastics or furniture, have even more interest in hedging against the risk because their jobs might be on the line.
By the same token, those working in the oil industry or in cities, like Calgary, that benefit from the oil industry, should make a bet on crude prices going down.
I’ll leave it to you to decide how many people are actually going to start hedging their oil consumption or real-estate equity, for that matter. But the theory is sound.
(4 June 2007)
