During the summer of 2008, consumer gas price hedging was a popular topic.  Consumers fed up with high gas costs could “hedge” their fuel purchases.  Hedging is essentially a glorified way of saying gambling, and many consumers who locked in those high prices are now realizing the losses from that gamble.  Mymoneyblog wrote a good summary about how to hedge against rising gas and oil prices earlier this year.  A gallon of gas was selling for $3.70 per gallon at the time.  The article mentioned three possibilities to hedge against even higher prices, including FuelBank, buying shares in an oil ETF (like USO), or buying futures directly on the oil commodity.

Many consumers did use Fuelbank or other services to lock in what are now much higher prices, and essentially losing the fuel price hedging gamble.  Unfortunately, a select few of those gas gamblers complained and demanded reimbursement for their gambles gone wrong.  Also in the summer of high prices, Chrysler created their new ad campaign to allow new car buyers to lock in $2.99 fuel. Anyone who bought a car based off the $2.99 per gallon promise have also lost money on the deal, and they need to take responsibility for their losses.

But fuel hedging did not start with consumers.  Corporations that wanted a more steady income stream would hedge their commodity purchases to even out the swings.  But over the long run, most corporations that hedge only do so as a means to even out the short term results.  Over the long run, an unhedged position will generally lose out over a hedged position.  Take the case of Southwest Airlines.  Jim Cramer praised Southwest as the only airline worth investing in because of their “foresight” into hedging fuel costs early.  Southwest had locked in those low fuel prices early and the later result was peace of mind at a time when United and American were drowning in jet fuel expenses.  But that peace of mind was only temporary as it watched oil tumble from the near $150 level down to the $40 level in just a few short months.  Businessweek wrote an excellent piece Southwest Sees Fuel Hedges’ Pesky Side.

The bottom line is that hedging can and does work to even out volatility, but at it’s heart, hedging is still a gamble.  Both corporations and consumers must realize the risks to the hedging gamble and roll with the punches that the market will inevitably deliver.

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