Tuesday, 27 January 2009

It Won't Change - Greater Victory Temple Choir (1992)

The following is courtesy of Janet Lawrence, our in-house Product Developer based in Oxford:

In August last year, in the midst of rising fuel prices, British Gas offered us the opportunity for a fixed-price gas contract for our home gas supply. My husband and I decided to not take them up on it. A "price cap" might have gotten us interested, but not a fixed price. A price cap would set a ceiling on what we would pay for our natural gas supply but would enable us to take advantage of lower prices should the market drop. That would have been worth considering, depending upon the details of the cap. But BG didn't offer that. They were simply offering to lock in the same price for natural gas, month in and month out, until the end of September 2011.

Yesterday there was a news report that British Gas had announced they will be lowering gas prices by 10%. That's great news, of course, even if wholesale gas prices have dropped more than 10%. At least it's a start.

But that alone is not the reason for this post.

One of the people interviewed by the BBC for the price-cut story was a retired man somewhere in Britain. Unlike us, he had chosen to go for the fixed-price contract last year. And he was upset that the 10% price cut wasn't going to apply to him. He said something like, "I'm so disappointed that my fixed rate hasn't changed."

As much sympathy as I have for a man who is probably living on a fixed income, I would say this to him: What is it about the term "fixed price" that you don't understand? That's the problem with a fixed price contract. It's great if prices rise, but it's not so great if prices fall. And as I occasionally had to tell my trading bosses, very few of us are clairvoyant about future oil and gas prices!

That's what risk management is all about. And we can all see examples of managing risk all the time in our day-to-day life. This one struck me as a very timely example.

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