The following appeared in a letter from a firm providing investment advice to a client.

The following appeared in a letter from a firm providing investment advice to a client.

“Homes in the northeastern United States, where winters are typically cold, have traditionally used oil as their major fuel for heating. Last year that region experienced 90 days with below-average temperatures, and climate forecasters at Waymarsh University predict that this weather pattern will continue for several more years. Furthermore, many new homes have been built in this region during the past year. Because these developments will certainly result in an increased demand for heating oil, we recommend investment in Consolidated Industries, one of whose major business operations is the retail sale of home heating oil.”

In this letter, the research firm suggests that its client invest in the heating oil industry to make profits. To support the claim, the company shows that the temperature pattern of the coming years would continue to be below-average, and that many new houses were constructed in the region, which would increase the demand for the oil. Although the investment may make the client a fortune, several questions need to be addressed before a final evaluation of the investment can be made.

To begin with, the firm cites the climate forecast made by Waymarsh University that predicts the continuous harsh weather of the northeastern United States. However, a question that must be addressed is whether the prediction itself is credible. It could be the case that the climate of the region would ramp up due to natural factors like wildfire or anthropogenic causes like global warming. Either case would make the company’s advice less cogent. However, the weather forecast may turn out to be accurate, which would bolster the suggestion offered by the firm.

Besides, the company asserts that more homes built in the area would lead to more demand for heating oil. But would the increase in the number of building necessarily result in the need for the oil to grow? Many of the newly-built homes would likely remain vacant through the next couple of years. It could also be the case that the residents of those new houses are resistant to cold weather and do not need the oil to warm the room. Both scenarios would not bring a significant increase to the sales of the oil, and thus make the prediction of the firm less plausible. However, the company’s advice may also prove correct if most of the houses are occupied, and the people living there are more susceptible to frosty climate.

Last but not least, granted that the climate forecast is sound and the new homes are widely dwelled by less cold-resistant people, the demand for the oil may remain virtually unchanged, if not dwindle. This is because the firm failed to consider that whether the people there still use oil for heating. They could adopt radiators, which are more effective and prevailing today, or some other more advanced heating technologies, which may come around by the time more people come to reside in the area. If this is the case, the sales of heating oil may plummet instead of burgeon, so do the outcome of the investment. But it is also possible that the oil is still commonly used by the residents of the region, which supports the statement of the company.

To conclude, while investment in the heating oil industry may benefit the firm’s client, it is not a conclusion that one can confidently arrive at at this moment, given a series of problems in the recommendation of the company. More aspects have to be taken into consideration to evaluate the business’s advice.