Take the Wild Card Out of Fuel Management

May 29, 2010 by  Filed under: Management 

Have you have been to Las Vegas, Atlantic City, horse racing track or bet on a football game? Do you ever feel like you’re going to win? Of course you do or you won’t go for the action. The entertainment dollar, fun, glitz but really we all know that those places weren’t built on winners. They were built on people losing money.

Now, you’re sitting at your desk and you’re putting together your fleet fuel budget for the next few months or all of next year. Do you have that same sense of fun and adrenaline that you have when you’re playing those games. Are you betting that diesel fuel prices won’t go higher or are you betting that diesel fuel prices won’t go lower?

Let’s not bet on diesel fuel prices doing anything, it is the one commodity that will kill you every time because when you think it can’t go up anymore it goes higher and just when you thought your fleet fuel price was going to be high to falls like a brick. Instead of having this happen, do what most of the larger companies do in the United States and do what almost every company does in Europe and that is manage the fleet fueling risk that you have with diesel fuel prices.

You can call it hedging, futures, fixed pricing or buying a call opinion or a putt on fleet fuel but I like to call it buying fuel insurance. Here is how it works and I feel is the easiest way to explain to people who are both gamblers and non gamblers. Let’s think about diesel fuel prices the same way you do about truck insurance but let’s take the part out that is required by law.

Your company buys truck insurance to protect its asset; the truck. The truck is worth a lot of money and if the driver causes an accident or your truck gets hit by an uninsured or underinsured motorist your company wants cover to cover the costs of getting the truck fixed. You pay a few each month or year to the insurance copy for your coverage and your coverage is more expensive if you have a lower deductible.

With your diesel fuel prices, you make your budget and go out to fleet fuel market to determine what fuel is selling for over the period of time that you are budgeting for. Let’s say it’s $3.00 a gallon for next month but for 11 months from now it’s $3.15 a gallon. Your average price works out to be $3.07 a gallon. Either included in that rate or the fleet fuel supplier will add a couple of cents a gallon for themselves, so overall you’re paying $3.10 for all of next year. If the price of fleet fuel is sold for more than $3.10 during the year, your company looks like a winner. If the costs of fleet fuel are sold for less than $3.10 during the year and let’s say its $2.70 you look like a loser by 40 cents per gallon but are you?

You buy tens of thousands of dollars each year for truck insurance. It’s a big number on your profit and loss statement at the end of the year if your trucks were only in a couple of minor accidents or no accidents at all. Do people look at you and say that guy is a loser we never should have had truck insurance? No, of course not because by having the insurance you mitigate risk against the company. If you didn’t have insurance and a big accident happened then what would happen?

With buying fleet fuel at $3.10 and it only costs $2.70 a gallon a year doesn’t make you a loser. How can you lose, you budgeted $3.10. You paid $3.10. You took the risk out of your fleet fuel program by having this insurance in place. Let’s say the opposite happened? For a truck it would be an accident; for fuel it would be high raising diesel fuel prices! Have you ever seen fleet fuel prices high? How about this, from February 2007 to September 2007 diesel fuel prices increased 55 cents a gallon and from October 2007 to July 2008 diesel fuel prices increased $1.71 a gallon. From August 2008 to March 2009 prices fell by $1.40 per gallon. Then from March 2009 until March 2010 diesel fuel prices went up 95 cents. With that said the accidents for your fleet fuel prices are out there. They happen all of the time. We don’t recommend trying to beat Vegas. Nor do we expect or think you should jump into this lake with both feet at the same time.

We do believe since prices have moved down by 30 cents a gallon for diesel fuel prices and crude oil has lost over 22%, now might be a good time to start talking about the next steps. All economic indicators in this country are strong and on the uptick. Yes, Europe is having issues and that along with excess supply has caused the oil market along with the stock market to fall but don’t be fueled (fooled).

These diesel fuel prices are going to shoot up like the BP rig in the Gulf. Once it starts going it might be hard to stop.

Glen Sokolis,
Sokolis Group
Fuel Management & Fuel Consulting
Industry Expert

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