Why Are Fuel Prices So Volatile?

This recent article over on the Supply & Demand Chain Executive Site by Barry Hochfelder on a volatile problem does a great job of sketching out the fuel supply chain and explaining why prices will sometimes change five to ten times a day!

At a high level, this is how a fuel supply chain works.

  1. The refiner receives oil and produces gas, diesel, and petroleum fuel products.
  2. Traders then buy and sell the fuel.
  3. Fuel is moved via pipelines, barges, and tankers to supplier storage tanks.
  4. Distributors transport the fuel to retailers or consumers.

So where’s the volatility?

  1. There are buyers, sellers and intermediaries between the pipelines.
    Furthermore, there are many suppliers at different terminals in the geographic locations where pipelines terminate into bulk storage. These suppliers advertise prices at their terminals. If they see a change, they will often move prices to their advantage.
  2. Then there are contracts.
    Buyers will procure fuel based on midday close and other complex calculations.
  3. And suppliers offer multiple price feeds to try and win contracts.
    With prices that change based on time of day, contracting terms, and calculation methodologies.
  4. Taxes are constantly changing.
    There have been over 1,800 changes in tax rates at the local, state, and federal levels.

And this volatility is not going away. Time to start preparing.