“It’s a game of cents, but when you add it all up it can add up to a lot of money on the bottom line,” Mossman says.
Off the Rack Fuel
Even with a contract or hedge system in place, the small percentage of fuel that is bought “off the rack” can still make up a significant cost. Those prices can jump nearly 15 cents per gallon in less than 24 hours depending on what’s going on on the major indexes like Platts or Opis. Fleet managers and fuel purchasers should at least keep an eye on those prices since they take around a day to trickle down to local suppliers. Knowing when to buy or not buy on the spot market can also save some money, although it isn’t a sure thing for reducing price risk, Mossman says.
Mossman also suggests index-based long-term contracts. For organizations that consume large quantities of fuel, it is possible to enter into a contract where the price paid for fuel is tied to the market price but set at a few cents per gallon below that market price. Those contracts are attractive to competitive businesses because they allow for fuel costs to come in a few cents per gallon below what competitors are paying.
Of course, the amount of fuel contracted for will determine how far under market price the contract will be. The more fuel purchased, the more likely a contract will be further below the market index it is tied to.
The good thing about these strategies is that they tend to work whether the fuel price market is rising or falling. In fact, Mossman doesn’t recommend overhauling a price volatility reduction strategy based on how the market acts over a short period of time, preferring to re-examine a strategy instead when an organization’s overall fuel goals change.
Being able to stay consistent with strategy is probably a good thing given current market conditions. Price spikes in early 2008 gave way to tumbling prices later that year and into this year. But, no one should take low prices now as an indication that they’ll stay that way for the long run.
“The companies that really get it understand that volatility is here to stay,” Mossman says.
Austin’s Capitol Metro has purchased swap contracts through December during its first efforts with fuel price hedging. The program hedges prices on about 50 percent of the diesel fuel used from October through December. Only about 30 percent is hedged from now until October, according to Hume.
“We have held off on doing additional hedges until we start seeing some consistent rise or pattern in fuel prices,” he says. “Since prices have been very low, we are trying to take advantage of that as long as we can.”
Realistically, Hume knows the hedge program is likely to grow once prices start back up, a seeming inevitability once worldwide demand picks up again as supply isn’t likely to increase.
“[The program] will probably grow once fuel pricing becomes more stable,” Hume says. “I doubt if we ever hedge more than 60 percent to 70 percent.”
It’s almost a foregone conclusion that prices will eventually head up again. Mossman points out that demand has dropped because of the slowing world economy. Once that picks up again the inherent supply issues that pushed prices so high last year will likely return.
The Metropolitan Transit Authority of Harris County, Houston already has its full fuel supply under price control measures.
“We include all Metro-operated and contract-operated revenue vehicles using diesel fuel,” according to Raequel Roberts, associate vice president of marketing, media and corporate communications for Metro.
The Houston program began in 2005 with a goal to minimize the volatility in the fuel budget variance, Roberts says.
“To date, Metro has seen a net savings when compared to the market,” she says. “The primary advantage is budget certainty for diesel fuel.”
Even with the price drops in recent months, organizations that still haven’t tried to find ways to minimize price risk are starting to look into what they can do.
“The run up in prices last year has definitely forced everyone to consider ways to manage the risk in prices as it concerns their fuel,” Penello says.