Fuel price risk management
A specialization of both financial risk management and oil price analysis – and similar to conventional risk management practice – fuel price risk management is a continual cyclic process that includes risk assessment, risk decision making, and the implementation of risk controls. Fuel price risk management focuses primarily on when and how an organization can best hedge against costly exposures to fuel price risk. Fuel price risk management is generally referred to as bunker hedging in a shipping context and fuel hedging in an aviation context.
Providers of fuel price risk management services
Fuel price risk management services are predominantly provided by specialist teams within large oil companies and financial services institutions. Examples include:
- Oil companies - Total S.A., Royal Dutch Shell, ExxonMobil, Koch Industries, BP
- Financial institutions - Goldman Sachs, Nomura plc, Barclays plc, Macquarie Bank, Citigroup, Morgan Stanley, Wells Fargo
- Fuel Management companies - Global Fuels & Lubricants, Mercatus Energy Advisors, ProtecoEnergy, New Wave Energy, HCEnergy, World Fuel Services
The fuel price risk management process
Similar to conventional risk management practice, fuel price risk management is considered a continual cyclic process that includes the following:
- Establishing the context
- current and future business environment
- financial position and budgets
- objectives and needs
- required fuel consumption, etc.
- Risk assessment
- fuel cost calculations
- risk identification
- the organization's attitude to risk
- exposure analysis to fuel price fluctuations
- scenarios of various hedging strategies
- Risk treatment
- implementation of a fuel price risk strategy
- Monitor and review
- Commodity markets
- Commodity risk
- Energy derivative
- Liquidity risk
- Market risk
- Risk modeling
- Southwest Airlines' fuel price risk strategy
- Crockford, Neil (1986). An Introduction to Risk Management (2nd ed.). Woodhead-Faulkner. ISBN 0-85941-332-2.
- "Committee Draft of ISO 31000 Risk management". International Organization for Standardization. 2007-06-15.