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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.)

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