Prebuying oil still a good bet

You might recall that a few years ago, the price of oil plunged, much as it has done in recent weeks. And you might recall that when it did, The Cabinet received a few letters to the editor from folks who had “pre-bought” their oil from local companies. For those unversed in the world of pre-buying, it means that you pay a set price in advance, in a lump sum, and your local supplier agrees to deliver your oil at that price even if the price goes up.

The letters we received were rather insistent that given the precipitous drop in the price of oil, companies should reimburse those who pre-bought because, after all, their pre-buy price was higher than what the oil was selling for after the drop. The same is the case today. Many folks pre-bought oil when the price was a good deal higher than it is now.

We hope, though, that pre-buyers have, this time, thought it through and realized that it would be grossly unfair to ask companies to refund one cent and here’s why:

Folks pre-buy, say, 1,000 gallons of oil because they are assuming that the price of oil will increase, especially during the winter. That’s the bet: It’s going to go up. When it does increase, as it often does, those who have pre-bought come out ahead. Say they paid $3.59 a gallon and during the winter the price went up to $4.09. Well, that’s a 50 cent per gallon saving. That’s a pretty good deal. They won their bet.

But this year, if we paid $3.59 a gallon and all of a sudden the price dropped to, let’s say, $3.29 per gallon, well, ouch: We’re out 30 cents a gallon.

Well, you know what we say to that? We say, those are the breaks and we who pre-bought can’t complain. We lost the bet. It happens.

When you pre-buy and the price of oil goes up, do you call up your dealer and say, “Hey, the price went up so I think it’s only fair that I send you some more money.” Highly doubtful. Why should we expect anything back when the price drops?

See, pre-buying really is like gambling in that you are betting that the price will go up. Unlike gambling, though, most of the time … You win. Because most of the time, the price does go up and we pre-buyers come out ahead. Now and then, though, it goes down and we lose. Oops.

The fact is, pre-buying is usually a very good deal. A few years ago, it wasn’t. This year, it isn’t. But in the long run, pre-buyers come out ahead.

The last time the price plunged, some people got a strange idea into their heads, to wit: Local dealers owed them something. That wasn’t true then, and it certainly isn’t true now.

With pre-buying, the odds are still in our favor and, compared to actual gambling, that’s pretty darn good.