PUBLISHER ‘S CORNER What kind of school bus would you buy for your district if fuel reached $8 per gallon? I’m
pretty sure you’d be considering an array of alternative energy options like propane, hybrid, CNG or electric. However, sit back for a second and really ponder that question. Could fuel even go that
Could Fuel
Prices Reach $8 Per Gallon? By Tony Corpin
tony@stnonline.com
high? What if it did? Could you protect against it? Te idea of fuel hedging isn’t a new one, but when fuel prices skyrocket, people react. Fuel prices are volatile by nature; however, we know that fuel price movements catch us off guard time and time again. Should school districts lock in now to hedge against higher prices? Having your school district exposed to such a volatile commodity is risky. Have you ever
considered implementing some basic fuel hedging strategies? Te benefits could be price protection, budget predictability and peace of mind. But the dark side of fuel hedging is that the actual value of some fuel contracts can go the wrong way if fuel prices dip on cer- tain types of fuel hedging contracts. According to Mercatus Energy Advisors, “Fuel Hedging is a contractual tool some large
fuel consuming companies, such as airlines, use to reduce their exposure to volatile and potentially rising fuel costs. A fuel hedge contract allows a large fuel consuming company to establish a fixed or capped cost, via a commodity swap or option. “Large fuel consuming companies enter into hedging contracts to mitigate their expo-
sure to future fuel prices that may be higher than current prices and/or to establish a known fuel cost for budgeting purposes. If a large fuel consuming company buys a fuel swap and the price of fuel declines, the company will effectively be forced to pay an above-market rate for fuel. If a large fuel consuming company buys a fuel call option and the price of fuel increases, the company will receive a return on the option that offsets their actual cost of fuel. If a large fuel consuming company buys a fuel call option, which requires an upfront premium cost, much like insurance, and the price of fuel decreases, the company will not receive a return on the option but they will benefit from buying fuel at the then lower cost.” Te cost of fuel hedging depends on the predicted future price of fuel. School districts
may place hedges based on either future prices of diesel fuel or on future prices of crude oil. Because crude oil is the source of diesel fuel, the price of crude oil and of diesel fuel usually correlate. However, other factors, such as difficulties regarding refinery capacity, may cause unusual divergence in the trends of crude oil and diesel fuel. School districts that want protection against pump price increases and want to retain
the ability to benefit from lower prices if pump prices fall may find call options or caps at- tractive. Tese behave the same way as the fixed price contracts if pump prices rise; you receive a payment from the hedge provider to compensate you for the higher prices you are paying at the pump. But if pump prices fall, advocates say, operators pay zero or limited premiums on the hedge and still can enjoy the lower pump prices. Each individual operation might be different and fuel hedging might not be the best
for everyone, but it’s something worth researching. It’s important to assess your risk and understand your risk tolerance. Tink about being offensive rather than defensive when it comes to one of the largest line items in your budget. ■
54 School Transportation News Magazine April 2012
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