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Overcoming Bias Commenter's avatar

That's true, Doug, something the market judged a low-probability event has occurred. Indeed, oil prices have consistently surprised the market for most of the past decade.

Ironically this very day I saw an article about how Southwest Airlines has managed to get a leg up over its competitors by using hedges to lock in favorable oil prices:

The airline, one of the largest at Los Angeles International Airport, locked in more than 70% of the fuel it expected to consume this year at about $51 a barrel, far below Thursday's closing crude price of $126.62 a barrel.

I posted about the same kind of hedging by the same airline above, a year and a half ago. At that time, SWA was benefiting from hedges created years earlier. Ironically, oil prices at the time I wrote were a seemingly high $60, and SWA was effectively paying far less. It seemed then that the hedging strategy had run its course, but now we see that the airline was in fact setting up new hedges, locking in those "high" prices and looking very smart now that oil has doubled.

The question is whether the spin on the new article, the same spin we heard before, is correct this time:

The advantage won't last forever because oil prices could plummet, and even if they stayed high the amount of fuel Southwest has been able to hedge in future years diminishes considerably from 55% next year to 30% in 2010.

I wonder if Southwest is defying the skeptics and eagerly locking in $120 oil for use in 2009-2012? Nobody seems to consider this as a possible strategy, but then nobody was talking about locking in $50 oil back in 2006.

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Overcoming Bias Commenter's avatar

Well, it's May 30, 1998, and oil is $127 a barrel...

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