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Opinion: Consider Hedging On-Road Fuel Costs

7/29/2011 8:00:00 AM

By Tom Wolfe
Director of Strategic Fuel Procurement
Maxum Petroleum

This Opinion piece appears in the July 25 print edition of Transport Topics. Click here to subscribe today.

Perhaps your company already has explored myriad ways to reduce the cost of on-road fuel — improving driver behavior, optimizing routes, truck-stop chain discounts, auxiliary power units, maintaining optimal tire pressures, keeping up on truck/trailer wheel alignments, etc. But have you considered hedging the cost of your on-road fuel?

Right now, you are probably thinking, “I might as well go to Vegas because we tried that before and lost a lot of money. Our company is conservative; we’ve never done it before and have survived so far. And anyway, I don’t understand hedging,� and on and on.

Before you turn this page, I’d like to provide an introduction to hedging and help you understand what hedging is not, what hedging is and why it may be a good tool for your fleet.

First, let’s understand what hedging isn’t: It’s not a way to reduce costs and outperform the market. It’s not implemented to make money, nor is it evaluated as a profit/loss item.

What is hedging, then? It is:

• A process implemented to reduce the effect fuel-price volatility will have on your business.

• A management tool used to control a cost, net revenue and net profit into the future.

• A plan put in place to control a cost over which you otherwise have no control or influence.

• A means of freeing you to manage the costs and events you can influence.

• A technique you can use to gain a competitive advantage.

Many fleet owners and managers assume their fuel surcharges adequately protect them from unpredictable fuel price spikes. With that in mind, let’s consider the reality of fuel surcharges.

Most fleets bill their surcharges based on the U.S. Department of Energy’s national average, which itself is based on the previous week’s fuel prices (see p. 30). If the price of fuel goes up on Wednesday, you can’t change your surcharge until the following Monday, and you are already behind.

Even if all your shippers pay 100% of your fuel surcharge, you can be about 25% short because you are buying gallons of fuel that cannot be billed toward a fuel surcharge — gallons burned on out-of-route miles, empty miles and idling.

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Emil Estafanous, CPA, CFF, CGMA