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Well, you van hold any opinion that you want but that opinion isn't even shared by the Bush Admin's Energy Department that said that even if drilling started immediately, the soonest oil would flow would be ten years, and it will only effect prices by a few pennies.
It's very simple math. A country that uses 25% of the world's oil but only has 3% of the world's reserves, can't drill itself out of it's problem. Only static thinkers would believe otherwise.
According to an Op-Ed, We Can Lower Oil Prices Now - WSJ.com , by Martin Feldstein in the Tuesday, July 1, The Wall Street Journal, "Economics offers a simple supply-and-demand explanation and reason for optimism about the future of commodity prices. In the case of oil, economics also suggests how policy changes today that affect the future could quickly lower the current price of oil."
Martin Feldstein, chairman of the Council of Economic Advisers under President Reagan, is a professor at Harvard and a member of The Wall Street Journal's board of contributors.
First, the DOE has already calculated what the increase in supply 10-17 years in the future would have on price -- pennies per gallon.
Second, Professor Feldstein also said:
Quote:
If the price of oil is expected to rise faster, they'll [oil producers] keep the oil in the ground. In contrast, if the price of oil is not expected to rise as fast as the rate of interest, the owners will extract more and invest the proceeds.
That's exactly why oil companies are sitting on millions of acres of undeveloped oil fields and why, even if Congress granted oil companies rights to drill in the oceans, they would not excercise that right (at least right now.) Why drill now and receive today's prices and invest at low interest rates? Instead, since they expect oil to rise in the future, oil companies know that they'll get a far higher return on investment holding the oil in the ground.
In any case, none of this does lifetimeliguy any good in deciding whether he should lock in the price for this winter. I'm personally addressing the problem by switching to gas, since I need a new bolier anyway and gas is more efficient and cleaner; mostly found on N. America and historically cheaper than oil.
According to an Op-Ed, We Can Lower Oil Prices Now - WSJ.com , by Martin Feldstein in the Tuesday, July 1, The Wall Street Journal, "Economics offers a simple supply-and-demand explanation and reason for optimism about the future of commodity prices. In the case of oil, economics also suggests how policy changes today that affect the future could quickly lower the current price of oil."
Martin Feldstein, chairman of the Council of Economic Advisers under President Reagan, is a professor at Harvard and a member of The Wall Street Journal's board of contributors.
First, the DOE has already calculated what the increase in supply 10-17 years in the future would have on price -- pennies per gallon.
DOE's short-to-intermediate term price forecasting record belies any confidence in their longer term price forecasting acumen.
Quote:
Originally Posted by MTAtech
Second, Professor Feldstein also said:That's exactly why oil companies are sitting on millions of acres of undeveloped oil fields and why, even if Congress granted oil companies rights to drill in the oceans, they would not excercise that right (at least right now.) Why drill now and receive today's prices and invest at low interest rates? Instead, since they expect oil to rise in the future, oil companies know that they'll get a far higher return on investment holding the oil in the ground.
Not the same thing as Feldstein was addressing in his OpEd: as I understand the situation, most, if not all, of these often cited unused domestic oil leases are either duds or otherwise restricted by gov't rules and regulations.
Quote:
Originally Posted by MTAtech
I'm personally addressing the problem by switching to gas, since I need a new bolier anyway and gas is more efficient and cleaner; mostly found on N. America and historically cheaper than oil.
Here, I agree with you, with one caveat: should there be a technological breakthrough and many cars/trucks switch to natural gas from gasoline/diesel then the price of natural gas will rise relative to heating oil.
All of these issues are worthy topics of discussion but with respect to lifetimeliguy's question about locking in, it's a matter of risk aversion. If the price that they will charge you per gallon is acceptable in order to lock-in but you couldn't afford to heat your home if it rose to $5.00 per gallon, then you may want to pay the risk premium to lock in.
However, if you can whether a possible price increase, you may want to take your chances.
Vertical put spreads as protection against a price decline
Quote:
Originally Posted by MTAtech
... (W)ith respect to lifetimeliguy's question about locking in, it's a matter of risk aversion. If the price that they will charge you per gallon is acceptable in order to lock-in but you couldn't afford to heat your home if it rose to $5.00 per gallon, then you may want to pay the risk premium to lock in.
However, if you can whether a possible price increase, you may want to take your chances.
All true, but lifetimeliguy, and others in a similar position, also have the additional alternative of "locking in" to protect against higher prices ANDsimultaneously doing one or more vertical put spreads* as protection against a price decline, should that occur.
* Buying (paying the premium on) one or more puts on futures that has/have a strike price just below the market and selling (receiving the premium on) an equal number of puts on futures with a lower strike price. If the market trades lower, the holder of the vertical put spread(s) will receive the price difference up to the difference between the two strike prices; while, if the market trades higher, the holder of the vertical put spread(s) will only be out the difference in the premium between buying the put(s) with the strike price just below the market and the premium received for selling the put(s) with the lower strike price. In a general sense, this is like paying the premium on an insurance contract to protect against lower prices that might occur after "locking in".
The above explanation has been quite brief, and anyone thinking of doing this alternative ("locking in" and doing one or more vertical put spreads) should check with a qualified investment professional for a more complete explanation.
While what you say is technically true, I really don't think oil options are a practical way for a homeowner to manage price risk in the energy markets. My understanding is that one unit is 1,000 barrels of oil -- which is about 40X more than most homes use. Locking in a price with the oil company does about the same thing with far more simplicity and without involving brokers and fees.
While what you say is technically true, I really don't think oil options are a practical way for a homeowner to manage price risk in the energy markets. My understanding is that one unit is 1,000 barrels of oil -- which is about 40X more than most homes use. Locking in a price with the oil company does about the same thing with far more simplicity and without involving brokers and fees.
While a regular size contract of crude oil is 1,000 42-gallon barrels and a regular size contract of heating oil and gasoline are 42,000 gallons, there are half-sized "mini" contracts available: 500 42-gallon barrels for crude, 21,000 gallons for heating oil and gasoline, respectively.
If the "mini" contracts are still too large, then get together with a few neighbors and friends who also want to follow the strategy of locking in the price and simultaneously purchasing a heating oil vertical put spread to "insure" the combined position's lock-in price against a price decline.
WG, Do you really think that's worth the trouble vs just locking in the price with the oil deliverer?
MTAtech, yes, if the person or persons, acting as a group, locking in the price of heating oil have good reason to suspect that heating oil prices may go lower during the heating season, than purchasing an "insurance policy" (vertical put spreads) that could return 30¢, 40¢, 50¢, etc., etc., a gallon, depending on how much "insurance" is purchased, could prove to be a very good idea.
The combination of locking-in the heating oil price and simultaneously doing vertical put spreads (that have a known cost and no margin calls) offers both upside and downside price protection, not just upside price protection.
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Vertical put spreads as protection against a price decline
