As a fuel supply company, we recognize how the fluctuation and impact of fuel prices can dramatically affect your business operations. To support you in navigating these choppy waters, we’ve compiled insights into the variables influencing fuel prices and strategies that can help soften their impact.
Understanding Fuel Price Determinants
Fuel prices are primarily governed by the fundamental principle of supply and demand. Organizational entities such as OPEC, a consortium of nations akin to a cartel, can manipulate global fuel prices by controlling their production levels. When these countries forecast a drop in demand, they might curtail their output to maintain price stability.
Geopolitics also wields significant influence over fuel prices. Contrary to popular belief, the sitting president or other political figures have minimal direct impact on prices. Legislation, regulations, and global political tensions have a more pronounced effect. Regulations posing obstacles for refiners, shippers, or transporters can inflate costs, which ultimately trickle down to fuel prices.
Moreover, fuel prices display regional variances. For instance, prices in Tennessee might differ from those in Georgia, and within a single state, prices can fluctuate from one city to another.
Surprisingly, the weather is another factor in the fuel price equation. Extreme weather events, such as hurricanes, can disrupt supply chains, especially if they strike refineries in susceptible regions like Texas, Louisiana, and Mississippi. Such disruptions force sourcing fuel from elsewhere, often at a higher cost.
Strategies to Mitigate the Impact of Fuel Price Fluctuations
Understanding the complex influences of the impact of fuel price fluctuations is half the battle. Here are some tactics to consider to mitigate the impact of fuel price fluctuations:
Assessing Your Fuel Needs
The first step is recognizing your business’ fuel consumption trends. Is your company a large-scale fuel consumer or does it operate on a smaller scale? Consider the specifics of your usage, such as whether your company manages a centralized fleet or deploys equipment across multiple sites.
Evaluating Your Purchasing Methods
Fuel can be procured in various ways: retail, bulk, mobile refueling, and consignment. Each method has unique advantages and disadvantages and can affect your vulnerability to fuel price volatility.
Implementing Hedging
Hedging stands as one of the most efficient ways to diminish exposure to fuel price fluctuations. Though hedging strategies vary greatly, they essentially involve securing budgeted fuel usage at currently trading market prices, thereby minimizing susceptibility to future price hikes.
Recouping Fuel Costs
Depending on your business model, you may be able to transfer fluctuating fuel costs to customers through a fuel surcharge. If your customer agreements permit this, an effective fuel surcharge can shield your company from surging fuel prices.
For businesses that are unable to transfer variable fuel costs, we suggest hedging as a primary strategy. These businesses often include utilities, construction, and waste service companies.
The objective is not to predict whether fuel prices will move up or down; rather for your business to successfully satisfy its budgeted fuel expenditure.
Role of Technology in Fuel Cost Management
Understanding the role of technology and adjusting financial planning in the face of the impact of fuel price volatility can be transformative. Technology serves as a powerful tool in mitigating exposure to these price fluctuations and is a key player in effective budgeting—a crucial strategy in managing fuel expenses.
Fuel tracking technology allows companies, particularly those operating extensive fleets across multiple locations, to monitor fuel usage and comprehend consumption trends. This technology enables a detailed analysis of fuel efficiency, factoring in equipment performance and operator behavior.
Fuel management technology for fleets can provide data on fuel economy, and record fuel expenses across various locations helping to mitigate the impact of fuel prices on your business. These systems not only boost efficiency and savings but also offer an added security layer, mitigating exposure to theft.
However, not all commercial fuel users harness this technology. Some still depend on manual recording of fuel data, which can lead to potential theft and data entry errors due to human error.
Financial Planning for Fuel Price Volatility
Budgeting and financial planning must adapt to respond to fuel price volatility. When businesses foresee an imminent rise in fuel prices—due to war, natural disaster, or other external factors—preparation becomes critical.
One method to mitigate risks linked with unpredictable fuel prices is to have a dynamic mechanism for recovering fuel costs built into your price agreements. This approach could safeguard the business from potential losses if fuel prices soar. However, not all businesses find this model suitable. Some may perceive it as uncompetitive or unacceptable to their clientele.
For businesses that can’t employ a fuel surcharge program, hedging serves as a viable alternative. This financial strategy protects companies from fuel price volatility. Predicting future fuel prices based on past expenditures and estimated inflation isn’t a reliable budgeting strategy.
Fuel prices are affected by a plethora of factors, including supply chain complexities and geopolitical events. This makes it virtually impossible to forecast future prices with absolute certainty. Therefore, businesses need a mechanism to recoup their fuel expenses or a robust hedging strategy to brace themselves for future fuel price fluctuations.
Embracing Uncertainty in Fuel Prices
It’s crucial for businesses to acknowledge that predicting the future of fuel prices is fraught with uncertainty. While indicators suggest potential constraints in the oil and energy supply chain leading to higher prices, other factors such as potential recession-induced demand destruction could bring prices down.
Hence, businesses need to consider a broad range of scenarios and construct flexible strategies to manage the impact of fuel price volatility. Technology and astute financial planning are essential elements in this intricate equation. We help our clients navigate these complexities every day. If you’re looking to create a better plan for your fuel spending and use, we’d love to talk with you. Learn more about how we can help you better manage your risk here.
