Advanced Oil Price Contract/ Yay or Nay?

July 17, 2007 3:48 PM

We're thinking of going with an "Advanced Oil Price Contract" this year. It's about 700+ gallons at 2.64 per gallon. I am wondering if people think it is a good idea ths year. It DOES not have any lower price protection.

I've never done it before and was wondering if people have been satisfied with paying up front.

posted by beccaj to home & garden (9 comments total)

Where are you located? How much does gas cost currently in your area?
posted by rancidchickn at 3:51 PM on July 17, 2007

Poster seems to be near Worcester, MA.

I don't have much of an opinion on this. You're offered an opportunity to gamble on gas prices. I'd guess that the entity offering this opportunity knows more about gas prices than you or I do. If you believe that, that in itself ought to help you make a decision.
posted by ikkyu2 at 3:57 PM on July 17, 2007 [1 favorite]

These things are based on futures contracts for oil. The basic idea is that whoever is selling this just buys a futures contract at the current price, adding some percentage for profit. Likely that profit is less than what is applied to normal prices at the pump because of the larger sale, but I really have no idea. Now, if you're asking whether we think oil prices will go up or down, we can't answer that any better than the people who priced the futures. Speculators who deal with this know a heck of a lot more than random strangers on the internet and their information has already been incorporated into the price. So in other words, $2.64 (minus the profit) is what the smartest people in the world think the price of oil will be.

To really answer your question then, you need to determine how sensitive you are to price increases. If you're just a typical person, driving to your job and around town or whatever, you're probably not that sensitive to prices and it won't make a huge deal if gas goes up $0.25 or down $0.25. But if there's some reason why higher prices might hurt you disportionately (say you drive a ton for a business and you'd have to close shop if gas went up a lot), then the contract would be a good idea.
posted by Durin's Bane at 4:32 PM on July 17, 2007

if people have been satisfied with paying up front

Southwest Airlines was, but they were of course ahead of the curve.
posted by Heywood Mogroot at 4:35 PM on July 17, 2007

How will the contract be executed :

1. by physically giving you the oil , for instance at pump
2. by giving you the difference between a current gas price (taken at any time at one pump) and the fixed price u were supposed to pay by entering the contract ?
posted by elpapacito at 5:26 PM on July 17, 2007

Are you talking about home heating oil?

It was a long time ago (think the first oil crisis), but when I was growing up near your neck of the woods my parents had a big (500-1000 gallon) tank installed in our yard (underground - which, I guess you can't do now) and I think they saved a good bit of money by buying and taking delivery in the summer at summer prices -- since the price inevitably went up in the winter.

I don't know anything about oil speculation -- I think it was a simple matter of supply and demand that prompted the oil company offering the deal back ten.
posted by nnk at 5:42 PM on July 17, 2007

that's 'then.'

and since your question is 'yay' or 'nay'

I would say 'yay' just because oil prices do seem to rise in the winter.

double 'yay' if you could get a tank somehow and take delivery now.
posted by nnk at 5:45 PM on July 17, 2007

It's just a question of risk tolerance. Essentially they're selling insurance against a price rise. As with all insurance, you lose if it doesn't happen.

The latest EIA short-term energy outlook forecasts heating oil reaching a maximum average retail price this winter of $2.56, compared to $2.45 last winter. They're probably wrong, but it seems as good a guess as any. You didn't mention how much your supplier is charging for oil right now, which would make some difference to the decision.

the price inevitably went up in the winter.

That didn't hold true last winter, though I've heard that it often does. Perhaps the market has gotten a bit more efficient since then, in part due to the popularity of these fixed-price contracts.
posted by sfenders at 6:43 PM on July 17, 2007

last winter was, by and large, a lot more mild in large section of the Midwest so demand was not as high as normal. The commodity will increase in price over time, whether or not that time also the relatively short period that you'll need it this time around is a random guess, but on balance I'd say yes.
posted by edgeways at 8:37 PM on July 17, 2007