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.

Our reading today took us to a speech made by current Fed Chairman Ben Bernanke, delivered back when he was a Fed Governor. As part of his analysis, he noted the following:

…it is rarely the case in economics that the optimal amount of insurance in any situation is zero.

Now Bernanke was not speaking about fuel hedging, but he could have been. It is as easy as one, two, three…

1. Surging fuel prices are a threat to the budgets of many businesses.
2. Insurance, in the form of simple hedging plans, is available.
3. There is an optimal amount of this insurance for each company….

…and that amount is not zero!

Fuel managers and CFO’s who do not yet have a hedging plan sometimes worry that they are “too late” to act. Bernanke’s sound economic principle would suggest doing something ….just get started. It is not the manager’s job to guess the future direction of energy prices any more than it would be to guess if and when there might be a fire.

Fleet managers who locked in lower fuel prices earlier this year are accepting congratulations. They are in the minority.

When prices move lower, it is natural to think that hedging is unnecessary.

When prices move higher, it is natural to think that one has “missed out” and it is now too late.

The combination of these psychological factors, discussed by Nobel Prize winning economists in the literature of behavioral finance, has a paralyzing effect:

It never seems to be the right time.

Meanwhile, Automotive Fleet suggests that prices may be moving to $4/gallon.

There is an objective way to determine the right time to act on hedging. The business considers its budget, based upon realistic projections, and controls risk by locking in that price. Many programs are available, including some that allow participation if prices do happen to move dramatically lower.

The job is not one of betting on the direction of fuel prices. It is one of eliminating the risk of higher prices to enable the part of your business that you can control to lead to greater profitability.