Here is a story that caught my attention earlier today; Oil cost hedging is not fail-safe, as airline and consumer experience shows.  In an effort to eliminate their risk, United Airlines and a Metro-New York City housing complex wound up losing a lot of money.

The price of oil was so unpredictable last year, that some analysts were projecting $200 a barrel.  Trying to be proactive, United Airlines attempted to control fuel costs with hedge contracts to control soaring prices.  If prices continued to rise, they would be covered, but they did not anticipate the price collapse in the second half of 2008.  So instead of benefiting with cheap oil, they were locked in at the now higher rates.

Here are some very educated analysts who got it completely wrong.  You see, hedging does not eliminate risk, it simply minimizes it.  The exposure comes when markets move wildly against you, then hedging can lead to loses.

Normally you would think of hedging as a safe play and usually you would be right.  Unfortunately the volatile price of oil destroyed a smart plan that was just trying to protect against loss. This proves that we can not reasonably plan or predict the future of oil.

Are you willing to continue betting our economy on oil when we obviously have such little control over price?  We need to spread our risk over many other energy alternatives.  Now that is how we can properly hedge our bets going forward.

photo credit: stoneflower