Beat the Price at the Pump

Fuel prices — they’ve been a PF standard water-cooler talk for most of the past decade, right up there with the weather and the office coffee.

But as wild as they’ve swung and as high as they’ve gone, the average driver hasn’t faced the same sort of budget shock that mass transit systems and other fleets have while fuel prices have done their best imitation of a roller coaster, heading up then down and repeating again and again.

To continue the roller coaster analogy, prices currently seem to have completed that thrilling drop from the top of the big hill, but chances are good there’s another incline somewhere ahead of us.

In mid-March the retail price of a gallon of diesel fuel averaged about $2.02 per gallon throughout the United States, down $1.95 per gallon from the same time in 2008, according to the U.S.

Department of Energy’s Energy Information Administration.

That is a microcosm of what can be learned from fuel prices in the past few years — prices are amazingly volatile and difficult to predict. That’s why, at least anecdotally, more fleets, including those within mass transit organizations, are seeking to reduce both cost and price risk by hedging the future cost of fuel in different ways.

Risk and Reward
In the current fuel climate, even the goals of reducing cost and price risk can be contradictory. Take the Greater Cleveland Regional Transportation Authority. The authority locked in diesel prices at $3.17 for this year, a price significantly higher than the retail market price right now. But, the price seemed like a good idea when the Cleveland RTA locked it in last year. Plus, at that price, the system’s fuel costs will come in at budget for sure, no matter how wildly prices swing in the remainder of the year, says Gale Fisk, executive director of the office of management and budget for the Cleveland RTA.

What looked like a good price at the time for Cleveland now looks like an outrageously high price, but it is still accomplishing what the transit authority set out to do. Such is the world of fuel price hedging. One can seek the greatest possible savings, the most stable price or to save a couple of cents per gallon over the average price, and there are a number of ways to accomplish those goals or a blend of those goals.

Figuring out what a mass transit organization wants its fuel plan to do is the first step in starting any plan, says Ryan Mossman, vice president and general manager of Houston-based FuelQuest’s fuel services division.

FuelQuest provides industry expertise and software to help vehicle fleets manage fuel cost and use. Clients include UPS, Costco, Wal-Mart, Greyhound and dozens of other retail and delivery fleets, some using as many as 100 million gallons of fuel annually.

Many groups, both businesses and in the public sector, go about reducing fuel price and risk in a less than exacting manner, Mossman says. They may call a handful of local suppliers and pick the one with the lowest price on that day, even when seeking a long-term contract, he says.

Such an approach will only net a group the lowest price on a given day from a very limited area, instead of looking at fuel costs in a holistic manner.

After identifying a goal for a fuel program, a group needs to compare its fuel spending to an industry average, usually using one of the fuel price indexes, like Platts or Opis, Mossman says.

Only after figuring out goals and assessing where fuel buying stands, can a fleet make decisions on whether long-term, fixed-price contracts, index-based contracts, buying in the spot market or what combination of those methods will work, Mossman says.

In Austin, Texas, Capital Metro Transit started its first efforts to hedge fuel price at the beginning of 2009. The goal of the program is to “provide the best price at the least risk to make our budget expenditures more predictable,” says Randall Hume, executive vice president for finance and administration at Capital Metro.