Barrick's bid to acquire Cadence Energy surprised me at first. After all, Barrick is a gold miner, right?

The nature of the bid was surprisingly local. Cadence is a small oil driller; we're talking tiny. They produce 3,600 barrels of oil a day. I mean, why bother? The short answer is this: Barrick is thinking globally, and acting locally.

With this deal, Cadence becomes a captive producer of oil - the nominal barrel of oil flowing from Cadence's wells goes directly to Barrick. Absorbing all of Cadence's production would replace some 25% of Barrick's energy needs.

Interestingly, Barrick didn't stop with this one deal. Yesterday, Barrick took things a step further, announcing it would buy ALL of the adjacent oilfield assets from Daylight, one of the competitive bidders for Cadence. This puts another 900 barrels of theoretical oil per day at its disposal. Barrick now owns its own little corner of Alberta, Canada, spewing 4,500 barrels a day of oil for at least the next decade. It's the equivalent of a home owner, fed up with oil prices, converting to a wood furnace and buying 200 acres of forest to get off the grid.

Here's how the admittedly simplistic math works. Cadence sat on 18.2 million barrels of oil, with an expected cost of extraction of $20/barrel. Assuming the new acquisition has similar scale, we can do some simple math.

Let's say production stays flat at 4,500 barrels a day, and nobody takes Christmas off. Barrick can now count on 1.6 million barrels of oil per year, at a cost of $33 million. At spot (or even a year out, given the current long-horizon flat futures curve), Barrick would have to spend about $120 per barrel to hedge a future oil spike, or a fully collateralized $192 million. That's a whopping $160 million economic argument in favor of owning your own cow to forgo all that milk. Even if these hypothetical extraction costs are off by a few hundred percent, it's still a compelling argument.

Understand that these are back-of-the-envelope calculations with all sorts of problems. For one, the oil field has more than just light sweet crude (70% of the field) - it's got natural gas and ugly oil too. It's also the case that this raw production won't end up in trucks and literally get transported for Barrick's use. Instead, the production from Barrick's new Canadian energy operation will go out into the open market, and those proceeds will let Barrick purchase actual energy in the form it needs it, where it needs it.

But it remains interesting as a true economic hedge. Barrick (and many commodities players) is rolling in cash. It just reported quarterly cash flow in excess of $500 million, a 58% increase over last year. The real question management and investors face is what to do with it. They can't just magically get more gold out of the ground, so controlling their costs for the future is a smart move - after all, the whole reason their cash flow is so high right now is because their current costs for extraction haven't gone up in lockstep with the price of gold.

There's a good chance that this is the tip of the iceberg. Commodities companies have much in common. Whether they're extracting ore, oil or crops from the earth, they are fundamentally in the same business - they make big investments, they deal with big governments and complex policies, and they run massive hedging operations. While the cost for actually producing some commodities has gone up, the fundamental drivers for higher prices has been demand, so we've seen most producers trade in line with increases in underlying commodities prices.

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