Professor David Enke of the University of Tulsa is an expert on risk management issues. At his excellent site he has pointed out how several airlines have experienced earnings hits from their hedging decisions.

Here is his key point:

So while hedging can help a company “lock-in” to a specific cost structure, if others within the same industry are not hedged, and those companies have pricing power, the hedged company can expect to see higher swings in profit margins and earnings, and subsequently a more volatile stock price.

Put another way, a company can control costs, but not earnings. If every airline engaged in hedging, then all customers would be protected against rising fuel prices, but would also exposed to falling prices.

Meanwhile, there are other hedging strategies. Our own approach differs depending upon the company. For some, locking in a current price is the best move. For others, there should be some protection against falling prices.

It is clear that the airlines did not use the most sophisticated hedging strategies.

Crude oil prices hit a free fall, declining nearly $100/barrel in a few months. Some see the upward spike as a “bubble” and the current price as evidence of a decline in demand. Others see a market that makes wild and excessive swings in both directions. There is already a rebound.

Which do you believe? Do you have any confidence in your opinion?

Here at Pumps we see the current decline as a gift to stressed-out fleet managers and their companies. Unless you really believe that oil prices can go a lot lower, it is time to think about locking in current levels.

Will crude oil prices double? We do not know for sure, and neither does anyone else. Having said this, the table seems tilted, suggesting that it is time to act…..

The current issue of Barron’s includes an interesting interview with “Mr. Crude.” Arjun N. Murti, the leading energy analyst at Goldman Sachs, has a distinguished record. He was dead on with a prediction of a spike in oil prices. He made his call in 2004 when oil was $40/barrel. What does he see now?

Murti sees energy in the later stages of a “super spike,” in which prices rise to a point where demand drops off. In a note last month, he wrote that “the possibility of $150-to-$200-per-barrel oil seems increasingly likely over the next six to 24 months.”

His rationale is easy to understand. Supply is constrained. Demand is firm and rising. Oil prices in the forecast range would imply gasoline prices of $5.75/ gallon. At this point, one could expect a further reduction in demand.

Consumers and businesses alike need to ask what this possibility would mean for them.

In particular, businesses with exposure to higher fuel prices need to act quickly. Despite the trend, this problem has taken many by surprise. Some astute business leaders seem to be in denial. Normally, one would expect businesses to anticipate and to deal with important risks. Most have not yet done so.

There are some very good answers to the problem, including those that we offer.

It is certainly time to plan, and probably time to act.

Analysts see a new plateau in fuel prices, with possible spikes. CNBC ran a series suggesting that current prices did not include a premium for hurricanes or other disasters.

Some analysts project gasoline prices of $7 to $10/gallon.

Thoughtful economic observers like James Hamilton attempt to separate the secular trend from speculation.

Meanwhile, many businesses are operating without much information, even when fuel costs represent one of their biggest threats.

Auto companies, airlines, and fleet managers are all scrambling to evaluate the threat. Is this really a surprise? The demand for fuel from developing countries is clear, US demand has remained relatively inelastic (so far) and supplies are not responding. It is time for a plan.

Many fleet managers would like to do fuel price hedging but run into an accounting problem. Either Treasury or accountants raise a question about qualifying under the FAS 133 regulations.

Gas-Lock Advisors has had excellent results in meeting the “hedge effectiveness” test required under FAS 133. Any fleet managers or CFO’s running into this problem should get in touch with us to learn how we are able to do this.

Sample reports are available. Your accountant will smile at the results. Call us at 630-548-0611 or email at jmiller@gas-lock.com.