Retailers, is it time to start thinking about your fuel contracts?

October 30th, 2008

With a barrel of oil selling for less than it was during mid 2007, it may be time for retailers to take a look at their fuel contracts to see if they can save some money.

As another earnings season comes to a close, we continue to hear of the negative impact that high fuel prices have had on operating results for all types of companies. Traditionally the best time of the year to buy diesel fuel is during February and March. If we look back over the past two years, the average price of diesel during that time period in 2007 was $2.40 per gallon and the following year in 2008 a gallon of diesel during the same timeframe was $3.30 and increase of 37.5% which is about where the market is today.

According to the Energy Information Organization or EIO, the price of diesel fuel has dropped a little over 10% during the last three weeks from $3.659 to $3.288 per gallon while the price of a barrel of crude has dropped over 55% since the middle of the summer. The problem is that diesel fuel is still 13% higher than it was at this time last year and a barrel of oil is cheaper. But more on Oil Company profits while retailers struggle at another time.

What the above points out is that fuel is a volatile & complex market and generally one of the top spend categories for many retailers. The question is; what is the best way to keep costs down in the fuel category? Some companies advocate annual contracts. This author is aware of several companies that in fact practice purchasing their fuel this way, yet were also citing rising fuel costs as a reason for their results. Other companies advocate treating fuel like the commodity that it is and applying the internal discipline of watching the fuel costs in the markets they serve on a daily basis and buying during the fluctuations we see in daily prices. In order for this process to work, companies must have a number of suppliers providing them with pricing. This allows companies to monitor against daily rack rates from sources such as OPIS or the Oil Price Information Service which further allows companies to determine what suppliers are making what types of margin. This provides a good source of data for negotiations.

Most e-procurement companies provide this type of technology which is really no more than an extended reverse auction with multiple award points and the capability to monitor an industry price through web feeds such as OPIS which are known as rss or really simple syndication. These services which are offered in the form of software as a service can generally be turned on in a matter of hours. The key to driving results is having a good source of new fuel suppliers that want to compete for your business.

Whether you contract annually for a portion or all of your fuel or decide to blend your purchases through commodity tracking, now may be a good time to take a look at tools that will help you with next years purchases.

We appreciate and look forward to your comments.

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