The Heap

Hedge Your Bets

Although fuel prices declined during last fall and winter, they have been inching back upwards lately. Generally speaking, that trend can be expected to continue in the coming years.

That was a point driven home by Jamey Holland, a risk management consultant for Kansas City, Mo.-based FCStone Trading, during Tuesday's "Take Charge of Fuel Prices: Effective Risk Management" conference session.

To illustrate his point, Holland cited studies predicting that global energy demand will increase by 44 percent over the next 20 years and that global oil demand will rise to 107 million barrels per day over the next two decades. Global demand is currently around 84 million barrels a day, he said.

Holland also noted that one study projects 2 billion cars to be on the road worldwide in 2030, up from 812 million automobiles just seven years ago.

Toss in the fact that the number of refineries in the United States is declining, and you have a climate ripe for soaring and volatile fuel prices, Holland said.

So, what's a fleet to do? Hedge, Holland said.

For one thing, fleets should consider buying call options, which function very much like insurance policies, Holland said. "It's like a policy against higher fuel prices," he said.

The fleet pays a premium, and if fuel prices rise above a pre-determined level, the increase is covered by the call option. If prices decline, then the fleet purchases gas for a lower price, and there is no claim on the policy, Holland explained.

Other hedging options include purchasing heating oil futures or swaps, Holland added, with the hope that gains in those investments will help offset increased diesel fuel expenditures.