Sep. 21--Believe it or not, oil companies don't know where the price of oil is headed. And that's why they hedge -- sell a portion, often a substantial portion, of their future production at a fixed price that they figure they can live with.

This year has offered a textbook example of just how tricky it can be to predict oil and natural gas prices. Crude oil's daily close on the futures market has been $87 to $145 a barrel in 2008, while natural gas has ranged from $7.25 and $13.58 per million British thermal units, roughly equivalent to 1,000 cubic feet of gas.

With many producers having committed billions of dollars to aggressive drilling and acquisition programs this year, prudence -- and sometimes lenders -- dictates that these companies insulate themselves from price fluctuations.

XTO Energy and Quicksilver Resources, for example, have hedged more than half and about 65 percent, respectively, of their expected 2009 production. Devon Energy, the biggest producer in the Barnett Shale, in 2008 hedged about 40 percent of its production.

Rick Buterbaugh, Quicksilver's vice president of investor relations, said the company hedges to make sure that it has the money to drill.

"We tend to outspend our cash flow," he said, as do other independents during the exploration boom for new petroleum reserves like shale gas. "So we lock in prices" that the company knows will cover exploration and development expenses, he said.

Craig Pirrong, director of energy markets at the University of Houston's Global Energy Management Institute, said: "The producers' perspective is, if they don't do anything, they live with the ups and downs of volatility. You give up the upside as protection against the downside."

In that regard, hedges looked like a boneheaded move earlier this year, when oil and gas prices rose relentlessly. Even worse, the companies were required by accounting rules to show big losses on their hedges, even though most of the loss was only on paper and didn't reflect day-to-day operations.

For example, Chesapeake Energy took a $2.1 billion write-down on the value of its hedges just in the second quarter, when natural gas prices spiked. Range Resources took a $164 million write-down on its hedges.

But after June 30, the end of the quarter, prices plunged by nearly half from their peak in early July. Then hedges looked like a better idea.

During a conference call with financial analysts July 24, Range executives said they recalculated the worth of their hedges the day before, when the $164 million write-down would have been erased.