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.

By Jeff Miller

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.