How Can I Protect Myself From Higher Gasoline Prices?

Over the past ten years average US prices for gasoline have ranged from under $1.60 per gallon in late 2008 to over $4.10 in June of that year.  In some parts of the country prices exceeded $5 per gallon in mid 2008.  From 2011 through mid 2014 prices ranged from $3.25 to $4 per gallon.

Today prices have dropped sharply to their lowest levels in years.  Starting in mid 2014 prices have ranged from just over $2/gallon to $2.75/gallon, with the average US price now around $2.19/gallon.

 

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Fuel costs can make or break a business that relies on transportation fuel like gasoline or diesel.  Today’s low prices have been a boon to companies with fleets of cars, vans or construction equipment.

Low gasoline prices have been driven by the worldwide crash in oil prices.  And they could drop even further:  Percentage-wise gasoline has not dropped as much as oil.  Refineries have been cashing in by capturing wider margins.  Eventually competition will force gasoline lower.

Companies must beware of complacency.  It is easy to forget that a little over a year ago prices were almost twice what they today.  What goes down can go up.  Oil prices will recover eventually.  Supply and demand moves all commodities markets.   As production slows in the face of low prices demand will push oil prices higher again.  And gasoline will follow.

How can businesses protect themselves from higher gasoline prices?  How do you hedge the cost of gasoline?  What can you do to insulate yourself from a spike in fuel costs?

One search engine returns some 266,000 answers to the query:  What can I do to protect myself from higher gasoline costs?   Sadly, you can stroll through dozens of these answers and still have no more of a clue how to hedge gasoline prices than when you started.

Most of the answers are downright silly.  Fill up when prices are low?  That will work for a day or two.  Optimize your delivery routes so you don’t burn as much fuel?  Good idea for any fleet but hardly enough to protect a business from doubling its fuels costs over night.

Some sites recommend buying oil and gas stocks.  That strategy would have cost you a lot of money if implemented last year:  Numerous oil and gas companies have gone under as crude oil prices have dropped by 50%.  More are destined for oblivion, taking their shareholders with them.

Still other sites recommend buying gasoline futures.  The trouble is that one futures contract is equal to precisely 42,000 gallons of gasoline delivered pro rata – i.e., the same every day – over the course of a month.  To buy that one contract you would have to deposit some $10,000 in original margin and be ready to meet periodic variation margin calls from the futures exchange if prices dropped any further.

Finally, there are the advisers that suggest doing what you always do:  Pass through any cost increases to your customers.  So let me see how this works:  As a taxi fleet owner gasoline is one of my biggest costs and I’m going to increase my meter costs dramatically to keep up with prices at the pump?

No thanks.

Finally there is a product that can help businesses lock in their transportation fuel costs, whether gasoline or diesel.  Called the Fuel Fox, it is a product developed by a retail energy marketer by the name of Crius.  Crius is a publicly traded company, listed on the Toronto Stock Exchange.

The company developed the Fuel Fox as a way to help fleet owners protect themselves from higher gasoline costs.    Effectively Crius will pool its customers’ needs and buy futures contracts for them.

The Fuel Fox helps you protect your budget from unanticipated gasoline or diesel price changes.  For the amount of gasoline you hedge you will not pay any more or any less, than you budgeted.

The Fuel Fox works like this:

  • You determine how much gasoline or diesel you use each month. A monthly minimum of 10,000 gallons is necessary to use the product.
  • You lock in the wholesale price of gasoline in New York Harbor, the delivery point of the futures contract that is traded on the New York Mercantile Exchange division of the Chicago Mercantile Exchange.
  • Say you lock in $2 per gallon for 10,000 gallons per month, January through December. If prices go up to $3 in any month, you will receive a check for $1 per gallon for that month.  That way your net cost will be what you budgeted.
  • If prices drop to $1.50 per gallon for a month you will pay $.50 per gallon for that month. Your net cost will be what you budgeted.

You may ask whether the Fuel Fox will protect you when your fleet fills up at gas stations in Massachusetts.  How does the price of gasoline in New York Harbor help you?

Interestingly, you really don’t care about the price of gasoline but the changes in the price.    And it turns out that, for many years, the price of gasoline at the pump in Massachusetts has changed – with a 97% correlation – as much as the price in New York Harbor.  If, over the past 10 years, the price of gasoline increased $1 in Massachusetts the price of gasoline in New York Harbor probably increased between $.97 and $1.03.

In other words, even if the price change is not exactly the same it is so close as to be immaterial.  Given the risk that gasoline and diesel prices pose for your business you are better off recovering 97% of your exposure than none at all!

Note that there is no cost for the Fuel Fox.  It is a contract under which you could collect money – or pay money – all in order to keep your budget intact.

We have looked closely at the Fuel Fox and believe it offers a practical way to protect companies from volatile gasoline and diesel prices.