City councils should never speculate!

And by speculate I mean make any attempt beat any market whatsoever. While we really oughtta give these civic minded council folk credit for their public service, if any of them could accurately foresee the next major boom or bust, they wouldn’t be sitting on a village board.

They’d be sipping mojitos on the their St. Thomas home lanai.  prarie state

But instead of getting into all sorts of talk about derivatives, spreads and dead cat bounces, let’s fall back on an example that almost every consumer can relate to.

Because we’ve all received at least one mailer describing how, with the hounds of energy hell barking at the gates, we can lock our natural gas or electric rates in at “today’s rock bottom prices.”

And God bless my lovely and long suffering wife, as smart as she is, she would gleefully hand me every single one of those merry missives saying, “let’s do it!” And, each time, I would patiently explain that the clearest indication of an energy price multi-year high was clenched right there in her left hand.

C’mon! Those primary and secondary energy companies aren’t stupid! How could they possibly make a buck if they sold electricity to you at the low, but then they had to purchase it at those inevitable and dire new highs?

It’s not what you would call a reasonable business model.

Need proof? At least once every two months the Tribune runs a sad story about some poor fixed income senior citizen who fell for the pitch and now pays four times the going rate for heat.

Not only that, but please tell me, when was the last time you received one of those solicitations? Not for a couple of years you say? That’s right! Because fracking, for better or worse, has driven energy prices so low that those companies wouldn’t dare make you an offer you really shouldn’t refuse.

But back to our non-speculation thesis. This is exactly the trap the cities of Geneva, Batavia and Rochelle, Illinois fell into when they signed a 2012 30-year contract with Prairie State Energy, a coal mine/electric plant in southern Illinois.

Though it’s somewhat of a simplification, the end result is those municipalities basically bought in at the high. So instead of paying the going market rate of $45 per megawatt hour, they’re paying 70 bucks!

There is a political move afoot by the Sierra Club, State Reps Michael Fortner and Tim Schmitz, and Sate Senators Karen McConnaughay, Jim Oberweis and Sue Rezinto to extract these cities from this albatross of a contract based on broken promises. But that’s not the point. (If you want to delve into the specific details please read the Susan Sarkauskus story on the subject.)

The point is these city councils should never have considered signing on the dotted line in the first place because they’re not good enough to beat the market. Virtually no one is.

My readers will happily tell you I’m no bleepin’ rocket scientist, but even I know that energy markets work like a pendulum within a general trend. And that general trend is up as it is with most markets.

Whenever gas or power prices hit what’s called a “near term high,” you can bet your sweet bippie that the energy companies will go to great lengths to find new ways of extracting more of the stuff in question. And those efforts will eventually and inevitably send those always speculative prices crashing down.

And when the price gets too cheap, exploration stops and, you guessed it…

The one investment strategy that actually does work is being the contrarian by betting against the herd. So my advice to you and all municipalities is, whenever you get one of those “lock in your energy rates” solicitations, run like hell!

7 thoughts on “City councils should never speculate!

  1. ESPECIALLY a 30 year term. I’d ask what they were thinking, but the answer is obvious: they weren’t.

  2. Jeff,

    What they were thinking is they could beat the market and they’re finding out the hard way they can’t!

  3. OR maybe they’re masochistic and said to the market “beat me, please”! Because that’s what’s happening.

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