Causes and effects of fuel hedging

China Eastern Airlines, one of the country's largest carriers, said it faces a "significant loss" for 2008 after fuel price hedges turned bad to the tune of 6.2 billion yuan ($906 million) (from Associated Press).

I think that this is very interesting phenomena, and suspect that this was going on rampant in 2008. Wikipedia explains what fuel hedging is: 

"A fuel hedge contract commits an airline to paying a pre-determined price for future jet fuel purchases. Airlines enter into such contracts as a bet that future jet fuel prices will be higher than current prices or to reduce the turbulence of confronting future expenses of unknown size. If the price of jet fuel falls and the airline hedged for a higher price, the airline will be forced to pay an above-market rate for jet fuel."

So airlines have bought a lot of fuel (--> oil) in 2008 when the prices were skyrocketing, basically paying a much higher price than they would have if they just bought at whatever market prices were after the spike. This makes me believe that the price collapse in oil from 145$ to 42$ (price today, January 12th, 2009) is partly due to this. When massive amounts of hedging contracts were made, the effect was that future demand decreased the same amount. "We have already bought all our jet fuel for the next 1,5 years, we don't need anymore".

Now the overall demand, and I mean how much oil is really consumed, hasn't declined much. What has declined is output, because of the fear that during worldwide economic crisis, everyone has to drive a lot less. And I happen to disagree with this. I will not believe that people have really started to use and buy less fuel, globally. That is just a gut feeling.

So what are the effects of fuel hedging in 2008, other than decline in prices? I suspect that prices will go back up. I think that commodities bull run isn't over yet. I'm with Jim Rogers on this one. When stocks and bonds lose their value, the most valuable thing are real things. People will always be in need of food and energy and raw materials. And investment in productive capacity just isn't happening. I mean, who wants to become a farmer, hands up? Or who is investing in a coal mine or lead mine? At times like these?

Long: commodities. Short: 30-year bonds.