Does Price Protection Make Sense In 2011?
For more than 15 years, Hart & Iliff has offered two different price protection programs and an even payment plan to help control winter heating costs.
However, this year, with near record high prices, we are asking ourselves these questions:
- Does it make sense to offer price protection programs?
- If we do offer them, does it make any sense for you to participate?
In order to offer price protection programs, we use a variety of contracts and options sold on the New York Mercantile Exchange and other energy future exchanges. There is a significant cost involved in procuring the gallons needed to offer these programs. As speculators and investors have increasingly entered the energy futures markets, the volatility of energy prices has increased and so have the option premiums
When we first started offering price protection programs, we could purchase a put option (to protect prices on the downside) or a call option (to protect prices on the upside) for about 4 to 5 cents per gallon. In recent years, these option premiums have ranged anywhere from 35 to 40 cents per gallon, making the cost of a put or call option about $400 per 1,000 gallons.
As we went to press, the price of crude oil was about $110 per barrel. Except for a short period in 2008, this is the highest price crude oil has ever traded at. Most experts believe that at least $20 of the barrel price relates to the situation in the Middle East and to other uncertain world events.
With prices at these inordinately high levels, does it make any sense to spend 40 cents per gallon, which is then included in the offered price, to protect against the risk that prices will go even higher? We are interested in your feedback as to whether you would be inclined to participate in a Price Protection Program for the 2011/2012 heating season. Please call 973-383-1421 or email us at info@hartandiliff.com with your thoughts.
