Risk Management

Fuel Intentions

Volatile fuel prices are creating new opportunities for some firms.
Alix StuartJuly 15, 2011

With the price of fuel climbing about 30% from January to early June, it’s small wonder that 80% of finance chiefs reported in the most recent Duke University/CFO Magazine Global Business Outlook Survey that high oil prices are hurting their companies (see “Treading Water“).

Finance executives have reacted in various ways. The most popular actions, each cited by approximately 40% of respondents, include making increased use of telecommuting/teleconferencing options, reducing business travel, and exploring more-efficient lighting and HVAC systems.

Meanwhile, a fair number — 30% — have taken the bold step of passing those increased energy prices along to customers, and another 14% plan to do so. But that doesn’t necessarily mean across-the-board price increases, says Craig Zawada, senior vice president for PROS Holdings, an enterprise pricing software firm. Instead, companies are taking — or, he says, should take — “a thoughtful and segmented approach, by identifying customers that are already underpriced relative to their peers, for example, or those that are unprofitable because of high costs.”

In short, higher energy prices may provide an opportunity to make price adjustments that companies have been putting off for too long.

As for other responses to rising oil prices, few companies — only about 10% — attempt to hedge those prices, while a slightly higher percentage use fixed-price contracts. That’s in part because such strategies primarily appeal to large consumers of oil, such as airlines or trucking companies.

But smaller companies have new options. Web-based Pricelock, for example, allows companies to put a ceiling on their gas spend at nearly any volume and price level. If the monthly national average price goes beyond that ceiling, the company receives a rebate for the difference. (On its end, Pricelock aggregates the contracts throughout the day and buys a more traditional hedge from an investment bank to cover them, reaping a profit through volume discounts, says Pricelock CEO Naveen Agarwal.)

Bill Janci, CFO of privately held McCorkle Nurseries, bought a three-month contract through Pricelock earlier this year to cover the Georgia-based grower’s biggest shipping months. The company outsources the trucking of its plants to such customers as Lowe’s and Home Depot, but still faces volatility in the form of fuel surcharges from its transportation vendors. Through the contract, Janci was able to stay within his budget even as gas prices rose far above the rate for which the company had planned; in fact, by the second month, his company had saved more than the contract cost. “The program worked well for us,” he says, “but you can’t be disappointed if you spend the money [for the contract] and you don’t need to use it.”

Indeed, few U.S.-based executives these days would be disappointed if oil prices dropped — not even Agarwal. “When prices go down, it’s a good time to buy fuel-price protection,” he quips.

How companies are responding to volatile oil prices