If I'm the supplier, and I know as well as anyone that prices of my product are rising, why the heck would I contract to sell it at a price lower than that (factoring carrying costs, interest rates, etc)?
Well, did you sell your entire portfolio in 2001 and put it 100% into oil futures or oil-industry stocks? Why not? Surely you knew that oil prices were going to skyrocket?
The same reason you didn't sell and put all of your assets in oil stocks is the same reason that all oil producers don't simply sell all of their production on the spot market (many do, but many diversify at least some of their production to lock in profits). Not only do they not know the future, but even if they did - there are times of short-term price fluctuations entirely out of their control that have nothing to do with long-term fundamentals.
For instance, on the negative side - as oil dropped after the Katrina spike, many people payed MORE for gasoline. Why? Even though the price of gasoline is usually directly correlated long-term to oil, there were many gasoline storage problems post-Katrina that spiked the gasoline price due to supply-demand imbalances, even though crude was restored to a normal supply-demand balance.
And the opposite can hold true. There could be an economic blockade against a country, legislation could require the average car fuel efficiency doubles to 30mpg city by 2010, etc..... which could result in a short-term oil glut - making oil cheaper. Even though long-term oil will trend higher, there is a short-term supply-demand imbalance that is artificially dropping prices lower.
Sure, it would be difficult to imagine an over-supply imbalance in oil, but it could happen. Just like we all take insurance out on various risks (homeowners, health, life, LTC, etc.), some people more so than others, because we want to limit/lock-in our exposure despite having the odds in our favor.
My point is, that on *average* (which is what FD said), it should work out just as you say, an added cost to the buyer. In the long run all things are equal, the estimates of the future prices of oil are as known to the buyers as they are the sellers. No one is willingly going to give up a profit, or pay extra. In the short run, there are winners and losers, but they both 'win' by getting a known price. If that did not have a benefit, neither would enter the contract.
Right? or wrong?
I'm sure if you looked at all of the oil contracts traded on the NYMEX, it probably totals a scant % of total daily global oil production - so it's not like we're talking about 80% of all oil pumped is hedged.
The problem is precisely that no one DOES know what the future prices are. Do you know what oil will be at in 2 years? Neither do the airlines or oil industry producers. You even say yourself that they are "ESTIMATES". Estimates are not 100% accurate. So, both parties are willing to pay/receive a certain % above a strike price that is mutually agreeable to both parties in exchange for locking in a certain price, whether the current oil price is $10/barrel or $100/barrel. So when you say it's an 'added cost to the buyer' - it really isn't. If we knew with 100% accuracy that oil was going to be $100/barrel on January 1, 2010...then, yes, the future hedge would be an added cost to the buyer, since they could simply buy oil at 100/barrel without paying the cost of the futures contract today.
However, because we have no idea what oil will be at 2 years from now, I would argue that you can't truly say that it's an 'extra' cost, because the future cost is unknown - it's just part of the total cost they pay. It would only be an extra cost if you knew for certain what the future cost would be (if oil ended up at $50/barrel, then yes, you could say it was an 'extra cost'..but if oil jumps to $400/barrel, then you wouldn't say that the futures hedge premium was an extra cost, since their net fuel cost is much lower than what it would be unhedged).