Hedging is not gambling
Shep,
I normally like your posts but this one is slightly off the mark. Hedging is not gambling. If you are an oil producer, you might be happy to enter into a future price agreement so that you know it is still economic at that future price, to pump the oil 6/12months from now.
If you are an oil consumer, you need to know what the price of oil is so that you can set ticket prices accordingly.
If you imagine oil price fluctuations fitted a perfect sine curve, then over time it would not matter whether you hedged or not. When oil prices peaked, you make a loss, when they trough you make double the profit. If you hedged, the price you paid would simply be the midpoint fuel price (almost - there are interest rate issues/volatality - but let's keep it simple) - so your profit would be steady over time. When oil prices are low, you lose money on the hedge but make on the spot price - and vice verca when oil prices are high.
Now whilst there are certainly 'waves' in prices, they don't fit any perfect curve. And on top of that - 'animal spirits' of fear and greed can take over.
When prices were very low(decade low), before I moved to the left seat, I remember asking the then CEO if we were hedging more than normal given the $15/barrel price! He dismissed me out of hand - I suspect the bean counters had got greedy - why hedge when you might make more money.
Juxtapose that with 2008 - everyone knew Oil would go up forever right? Fear took over - and they made a billion dollar 'mark to market' loss on their hedging. I haven't gone back through the Annual Reports for a while but I am pretty sure they never recovered, in future hedging gains, as much as they lost in that year.
So in principle hedging is good - in practice, human beings screw it up.
And it is a bit like frequent flyer programs - if no airline had them, they would all be better off. So if one airline hedges 'successfully' it has a temporary pricing advantage over unhedged competitors.
So it's a case of 'getting it wrong together' is safer than 'getting it right or wrong solo'.
Mutual Fund managers, car manufacturers, service providers etc etc all have the same insane 'better to be wrong together' paradigm!