Fuel Hedging and Risk Management. Gajjala Vishnu N.

      This edition first published 2016

      © 2016 S. Mohamed Dafir and Vishnu N. Gajjala

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      ISBN 978-1-119-02672-3 (hardback)

      ISBN 978-1-119-02675-4 (ebk)

      ISBN 978-1-119-02673-0 (ebk)

      ISBN 978-1-119-02674-7 (obk)

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      Preface

      If you had asked me 15 years ago what kind of book I would have liked to write, my answer would have been philosophy, politics, or poetry. I never would have imagined that the day would come that would find me writing about a topic such as fuel oils: substances still associated with childhood memories of images of oiled seabirds or with the smell of gasoline that instantly calls to mind car sickness.

      But if you were to next ask me why I have written a book about fuel hedging, the first answer that might come to my mind would be because I am good at it and that experience has shown me that there are so many people out there who would benefit from learning about it, otherwise remaining disadvantaged and at the mercy of ruthless and sophisticated fuel derivatives practitioners. After giving the question a second thought, I might realize that I shouldn't try to protect any party. After all, there are, there have been, and there will always be fat cats and hungry dogs in this world. My subsequent answer would be that by writing this book, I might be unconsciously trying to defend the truth that this practice has merit, that there is a science behind it, and that mishaps of the past should in no way diminish fuel risk management techniques, but rather reveal the omissions of the unvigilant, the mistakes of the careless, and the incompetence of charlatans.

      In 2013, when I first got in touch with Wiley, my intention was to write a book about commodity derivatives. But after long discussions with Vishnu, it became clear to us that a book focused on fuel hedging would be particularly useful. Vishnu Gajjala is not only my coauthor; Vishnu and I worked together in commodities structuring for seven years and because of that, I know Vishnu has a unique blend of expertise, discipline, and patience – essential to writing an outstanding book. We also share the hope that this book will serve as a continuing encouragement, reminder, and, when necessary, an exhortation for fuel hedging practitioners to think off the beaten path. We made it to this finish line together, and I cannot imagine going through this book-writing journey with anyone else.

      During the time it took to write the book, many market and geopolitical events unraveled, impacting the energy market landscape. It was therefore important to refrain from chasing events but rather to focus on how to help the reader anticipate and participate in the dynamic energy market. This exercise was equally enriching for me, especially due to the warm discussions that I had with people close to me who were interested in knowing more about the book and the rationale behind it.

      After Rab Arous, a friend of mine, once asked me how I had ended up working in this field, my candid answer was that the smell of the petrodollar might not be as bad as that of petrol. By indexing the compensation for protection and security of trade routes to the most traded commodity, the petrodollar system allows the smooth projection of power, oiling rusty human relationships. Having played a central role in the geopolitics of the last 30 years, oil has not only become an underlying reason for many territorial conflicts, but also a means of coercion and pressure. This was remarked on by President Vladimir Putin in the midst of the Ukrainian crisis and spectacular decline of oil prices, when he stated that “A political component is always present in oil prices. Furthermore, at some moments of crisis it starts to feel like it is the politics that prevails in the pricing of energy resources.” The use of this perception of oil to justify economic war could only sound legitimate in light of the statement made by President Reagan's son, who, in March 2014, said, “Since selling oil was the source of the Kremlin's wealth, my father got the Saudis to flood the market with cheap oil… Lower oil prices devalued the ruble, causing the USSR to go bankrupt, which led to perestroika and Mikhail Gorbachev and the collapse of the Soviet Empire.” Even though such an unverified claim might not provide a complete explanation of the fall in oil prices back then, there is a strong sentiment that even the recent change of tack on oil prices by Gulf States was designed to use oil prices to pressurize Iran and Russia to come

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