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July 31, 2006

Fleet Managers Ask, We answer


By Jeff Miller, CEO, Gas-Lock Advisors, LLC

Q: I thought about hedging my fuel budget 3 mos. (or 6 mos. or a year) ago, but I didn’t do it. What should I do now?

A: First, realize you are not alone. Fuel cost increases are a new problem for fleet managers. Any time there is something new, it takes business a while to respond.

Next, you can’t second guess yourself. You did what you thought was right then. Now, it’s a new day and a new problem.

Q: I would jump on the chance to lock in the price of $2.25/gal. Or even $2.65, my budget for this year. Don’t prices usually go back down? They always have before.

A: The futures market for crude oil is massive. It is an excellent reflection of how big money — both buyers and sellers—see the future of oil prices. That market is telling us that we are at a new plateau. Boone Pickens is famously accurate in his predictions. He is calling for $80 oil soon and probably $100/barrel before year end.

Q: Why should there be a new plateau?

A: The fundamentals of supply and demand have changed. The new production seems to have peaked. Meanwhile, Chinese auto sales are up 74% over last year. An estimated 100 million Chinese families can now afford to buy a car, and that’s just getting started. Same story in India. If (when?) the Chinese drive like we do, they will need the entire world oil supply.

Q: OK, I can live with the new plateau. I’ll just adjust my budget.

A: What if there are more hurricanes? This year’s starting price is the spike we saw during hurricanes last year. What if Iranian or Nigerian oil is taken out of circulation? That would be an instant move to over $100/barrel.

Q: Isn’t it just gambling to hedge fuel prices? What if I am wrong? My boss (or board or shareholders) will think that I did something foolish.

A: Since you know that you are going to buy 10 million gallons of fuel next year (or 1 million or 100 million) you are already gambling that prices will not go up. Fuel hedging is not a gamble. It reduces risk. If you buy fire insurance do you think you are betting that your building will burn down?

You are compensated by your company to recognize business risks and act decisively. This means showing some leadership.

We are going to make a prediction here. Some major US companies are going to go bankrupt because of inadequate fuel hedging. We just saw UPS lose $10 billion in market cap in two days. Norfolk Southern got whacked today. Airlines have already felt it. Auto companies will see lots full of SUVs if gas spikes to $4 or $5

If you cannot bring yourself to hedge your entire exposure, hedge half of it. Or 1/3 of it. If prices pull back, you can do more. If prices go up, you have done something.

(This article was originally published in the print version of “Pumps,” Vol 2.)

Is Green the New Black (Gold) ?


Maybe yes and maybe no.

There have been mixed reports about the prospects of the ethanol industry, but with bigger political support and higher gasoline prices a number of companies are on the verge of IPO’s.

Analysts caution about risk, even as they see industry fundamentals improving.

Now, E85 is not just somebody’s science project. It is already widely used in Sweden and Brazil.

In fact, way back when, a variant of Ford’s Model T was capable of running on gasoline or ethanol. So was the 1927 Model A!

Some facts about E85, an alcohol fuel mixture of 85% ethanol and 15% gasoline:

gaspricesedgeup.jpgAs of 2005, E85 is often sold for up to 36% less than gas (much due to governments subsidies)

There are only about 675 stations in the US where you can fill up your tank. Most are in the Midwest.

In order to use E85, you must have an E85 flexible fuel vehicle (FFV).

In a recent press release, the Big Three have announced plans to double FFV production to 2 million vehicles by 2010

After-market conversion kits are generally not legal in states with emission controls.

Yes, Green may be the new Black, but it’s not a gusher yet.

(Previously published in the print version of “Pumps,” Vol. 2)

Filed under:Causes and Solutions,Fuel Economy,Fuel Price Trends | by Pump Girl @ 3:06 pm |