A Volatile Problem

A blend of price, taxation and contracting make the fuel supply chain a risky business


Pricing is critical in a fuel market characterized by significant volatility. To combat this volatility, savvy fuel buyers employ a strategy of balancing the various types of indices – either by using one provider with multiple feeds or multiple providers with one type of feed. For example, some price indices are based on the previous day and some on the same day. By mixing the two, the fuel buyer, assuming he has a sophisticated fuel management process, can mitigate the effects of day-to-day volatility. Likewise, by choosing contracts based on indices with different times of day for posting (for example, 10 a.m. vs. 6 p.m.) and different methodologies (all-day vs. closing vs. last part of trading day), the buyer can mollify the impacts.

“As with any expensive asset, reducing buying risk through a diverse portfolio of supply options is an important fuel strategy,” adds Ryan Mossman, VP and General Manager Fuel Services at FuelQuest. “If done well, fuel buyers can actually turn price volatility into a competitive advantage.”

A Taxing Issue

Finally, there’s perhaps the most complex issue of all: taxes. There was a 400 percent increase from 2009 to 2010 in the number of motor fuel excise tax changes. So far this year, there have been more than 1,800 changes at the local, state and federal levels. And, because of multiple participants in the supply chain, it’s not a consistently calculated tax or invoice payment.

“Cook County, Ill., has its own motor fuel taxes separate from Illinois,” Tormollen says. “Muscle Shoals, Ala., [has a tax rate] different than the state. Where it gets tricky is, it’s not like sales tax. Motor fuels are excise taxes so they’re at point of order. If the source produces it in Mississippi and drops it in Muscle Shoals, what are the tax implications, and who do you pay?”

For example, a single fuel load that crosses the Tennessee and Alabama borders will pay: federal excise tax; federal oil spill tax (per gallon rate); Tennessee state export tax; Alabama state gasoline tax; Alabama stage gasoline additional excise tax; Alabama state gasoline inspection fee; Montgomery County, Ala.; gasoline tax; Montgomery city gasoline tax; and Alabama state UST fee.

“Our rough estimates based on tens of thousands of reconciliations monthly is that five to seven percent of invoices are wrong at some level, either related to taxation or freight charges,” Tormollen explains.

What to do

The business problems can be enormous. Auto parts stores, truckers, manufacturing and distribution are all touched by fuel. In fact, for those businesses fuel costs are typically 25 to 35 percent of operating expenses, says Tormollen, whose company manages 17 billion gallons of fuel.

FuelQuest provides on-demand fuel management systems and outsourcing services. They manage the procurement, management, and taxation of bulk fuel and serve retailers, distributors, manufacturers and fleets such as UPS, Ben E. Keith, Smithfield Food, Federal Express, Swift and more. The company managers more than 18 billion gallons of fuel through its fuel management solutions.

“What do we recommend?” he says. “First and foremost, security of your supply, because the main thing is the fuel in the tanks to keep your business going. Second, aggregate buying power by centralized procurement. Time and time again, organizations decentralize procurement of fuel down to the distributor level. He’ll take the path of least resistance, and that will be the worst economic option. That 3PL is incentivized to optimize its property (the trucks) and because it owns the fuel, it will be marked up. He’ll keep your tanks full, but you’ll be paying more for freight and delivery. And you won’t be optimizing your fuel.”

Finally, says Tormollen, look at price protection options for a certain percentage of fuel. “Do I want to look at financial options related to a fixed price? Within certain boundaries, given the volatility, you want to capitalize daily.”

Takeaways:

  •  In the last five years, fuel prices have increased 10-fold

  • There was a 400 percent increase from 2009 to 2010 in motor fuel excise taxes
  • The complexity of fuel-price contracts is exponential
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