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Fuel Budgets and Hedging: What Is the Relationship

By Jeff Miller

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FLEET MANAGERS AND CFO’S OFTEN LINK THEIR DECISIONS ABOUT HEDGING PRICES WITH THEIR CORPORATE BUDGET PROCESS. HERE ARE SOME TYPICAL QUESTIONS THAT I GET:

Q: I am worried about fuel prices later this year, and I like the idea of hedging, but isn’t it too late? We are already part way through our fiscal year, and the budget is set. We have nothing in there to pay for a hedge.

A: A hedging program can be designed to fit the remaining part of a fiscal year. Many executives are surprised to learn that fuel protection programs might not require any premium payment. They can protect their budgets even if there is nothing allocated for a premium payment.

Q: My fiscal year does not begin until April. I am interested in protecting my fuel budget, but we can’t do anything until then. Will prices still be attractive in April?

A: A fuel hedge can be set for any time period the customer needs. It is possible to lock in a low-cost or zero-cost program right now, even though it does not take effect until April. Who knows what prices will be in April!

THERE ARE TWO KEY TAKEAWAYS ON FUEL BUDGETS AND HEDGING:

Why hedge? Because a fuel hedge is the only way to assure that the budget is met, even if prices once again spiral out of control.

When to hedge? The best time to act is when risk is high and prices are attractive. It has been a fortunate period for fuel prices — a benevolent hurricane season and warm weather. Managers who are beating their budgets can make sure it stays that way, even if this year’s weather is not as friendly.

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