With energy prices falling, most observers relax. Understanding energy prices requires a deeper understanding of fundamental factors.

There is also the matter of time frames. In the short term prices may be softer, responding to global factors like the currency trade or perceived economic weakness. We need to put this in a broader perspective.

Here is the observation of John Taylor, head of the largest and most successful currency hedge fund:

In five years, he says, “we could see oil at $500 a barrel. I would be a buyer on dips of oil.

His bold prediction could be wrong, but it is worth considering. Here at Pumps we agree with the basic thesis — long term strength in energy prices, current weakness presenting an opportunity.

So much for Obama’s Strategic Petroleum Reserve move!

As PumpGirl noted, oil prices moved higher, perhaps in line with the (modestly) positive economic news from the ADP jobs report.

Meanwhile, gasoline futures at the NYMEX spiked higher by almost thirteen cents! The entire forward curve for the next year is up by more than ten cents. I looked at the bottom month in the next year and the implied pump price is about $3.50. The average is significantly higher.

For managers who are planning ahead, the window of opportunity to lock in prices may not be open for long.

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.