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."
Write a response in which you discuss what questions would need to be answered in order to decide whether the recommendation and the argument on which it is based are reasonable. Be sure to explain how the answers to these questions would help to evaluate the recommendation.
In this letter to potential investors, the author recommends investment in Consolidated Industries, one of whose major business operations is residential heating oil, because of the anticipated greater demand for heating oil. To support his/her claim, the author quotes the climate forecast indicating continuing harsh winter weather as well as the increasing number of houses being built in this region. Quite convincing though his/her argument may seem at first glance, there are a number of questions regarding his/her lines of reasoning that requires further analysis. The argument could end up being pretty convincing or invalid in the end, depending on the answers to those questions.
To begin with, the author’s reasoning relies heavily on the accuracy of the climate forecaster, a question that is not answered. It is possible that the predictions about future climate are completely wrong, because the Earth’s climate system is highly complex and can change rather unpredictably. Without additional information to evaluate future climate and winter weather conditions, it is possible that the northeastern United States could actually experience warmer winters. This scenario would seriously challenge the predicted increase in oil demand, and render the author’s recommendation much less advisable. On the other hand, any valid proof that the forecast is well founded will strengthen the author’s argument.
Granted that future climate will be extremely cold and given the fact that new houses are being built in this region, whether or not oil demand will increase in response to colder winters and increasing population needs a second look. Behind the author’s argument lie two critical implied assertions. The first one is that people will spend their winter in this very region, which could be wrong. The possibility that people would migrate to warmer areas, such as the southeastern United States, during the winter to escape from the bitter cold must be considered and addressed. Yet, if the author can provide information to unequivocally demonstrate that a substantial number of people live in the northeast during the winter, his/her conclusion will have weight.
Furthermore, the second assertion is that oil will remain the major fuel for heating in the future. Although in the past people have traditionally used oil for residential heating, the possibility that new heating methods may emerge cannot be excluded. For example, residential heating powered by nuclear or solar energy may enter the market and begin to compete with traditional fossil fuels. We have no clue if the dominance of oil in energy market will still persist. If no, the demand for oil is unlikely to increase despite the fact that there is indeed a huge demand for residential heating. On the other hand, increased oil demand can be expected from a continued heavy reliance on oil, creating favorable market conditions for Consolidated.
Finally, even if we acknowledge for a moment that oil demand does rise in response to harsh weather and population growth, it remains to be seen whether Consolidated Industries can capitalize on this as the author assumes. Other factors, such as management efficiency and local competition, could potentially affect Consolidated’s financial performance. If, for instance, Consolidated is poorly managed and there is widespread corruption within the corporation, it is doubtful that Consolidated will be hugely profitable and worth investment.
To sum up, although a cold, harsh climate and a rising population have the potential to elevate the demand for heating oil, this is not a conclusion that can be derived from the information available in this argument. Furthermore, even if oil demand does rise, the investment recommendation is built upon a shaky assertion, which is still open to different possibilities. Only after those questions are adequately addressed can we effectively evaluate the author’s argument and reach a logically sound conclusion.