Diesel Days
28 April 2011
Sean Russo
APRIL 27: LAST week I drove about 2300km around New South Wales visiting a couple of mates on rural properties and doing a bit of camping and bush bashing with my youngest son. One simple pleasure of country driving in a diesel vehicle is being able to use the high-flow bowsers at truck-stops. Those suckers will fill an 80-litre tank in less than a minute.
In this world where we often open the microwave before its allotted time those are precious minutes saved! Of course at $A1.56 per litre it does have its downside. Somehow getting a full tank and a charge of $125 in less than a minute doesn’t seem to be anything like the value you get in town where it can take nearly three minutes to rack up a fuel bill like that.
When I bought the car in 2003 (pre-mining boom) diesel was at a discount to unleaded and they were both a great deal cheaper than they are today. To the howls of derision from my family who thought the vehicle (a Land Rover Discovery) noisy and ugly, I simply said just wait till oil gets to 60 dollars a barrel then you’ll see how smart I am. Given I was only buying the vehicle because my six-year-old Range Rover had caught fire, without any outside assistance, and gone to god the week before, it is hard with hindsight to think how I might have been quite so sanctimonious about my choice of vehicle. As for my oil price prediction, made at time where we were being told oil would never rise again, I do feel somewhat vindicated. Of course had I bought a smaller, less expensive petrol car and spent the rest on Woodside shares (or any well run energy company) that would have been a much better hedge.
That’s the thing about hedging strategies – even when you get it right there will be someone, if not the little man or woman inside your head, telling you how much better you might have done. Oh, and when you get it wrong, the world can tell you why.
On at least three occasions last week I saw professional truck drivers drafting behind a lead vehicle. I am guessing/hoping, in some sort of agreement with the vehicle in front. In the most scary example I saw two semis and a B-double in a formation so tight that each vehicle was little more than car length behind the one in front. I assume they were in contact by radio and had agreed a set speed and they were all very familiar with the road ahead. All that to one side, the potential devastation that could occur were something or someone to turn unexpectedly in front of the lead vehicle doesn’t bear thinking about.
I assume this very dangerous practice is all about trying to reduce their fuel bills. I don’t know how much this practice might save them but surely the savings don’t justify the possible consequences.
I can only assume that without these types of actions the returns on the haulage result in a loss and that somehow the perceived risk taken is believed warranted if it delivers a positive cash outcome.
Observing such behaviour, that seems to reek of desperation, makes it difficult to take seriously the claims that the two-speed Australian economy is a myth. Surely passing on costs to customers is better than putting your life and the life of others at risk. Mining companies may well be able to afford current fuel prices and still make a buck but other parts of the economy that are not enjoying China-driven revenues are clearly suffering. Their only respite is that the spill-over of commodity strength into AUD strength has lessened the impact of international oil prices on domestic fuel prices. Imagine what we would be paying at the pump if the AUD was still in the US80c’s.
I found it particularly concerning this week that one leading economist pointed to the growth in the economy of the Australian Capital Territory as an example of the non-existence of the “supposed” two speed economy. Growth in the ACT, despite a lack of mining, is not proof of the non-existence of the two speed economy, it’s simply testament to the ongoing growth in government and those who feed off it. Those are fixed costs we won’t quickly shake if the positives elsewhere in the economy diminish. Meanwhile Western Australia, our mining capital territory, seems to be up against stronger headwinds.
Like the truckies I saw, Canberra is speeding down the highway tailgating WA and they’re so close they can’t see the road ahead. Meanwhile, WA’s visibility is dropping. It’s not a good recipe.
Individual truck drivers have limited capacity to hedge. They will also almost certainly overestimate their ability to tailgate or draught safely and underestimate the risks.
Governments don’t need to hedge because they always have us (or our kids to bail them out) even though they make out they are bailing us out.
In my observation too few companies appropriately assess financial market risk and very few seem to do any form of structured hedging. Like the truckies they overestimate their abilities to predict the conditions on the road ahead and underestimate their risks. Many that don’t hedge have so far been rewarded for sloth; their inaction to date has often been rewarded, or possibly just not yet punished (just like the high-risk convoy).
Margins for many businesses are narrowing at a time it seems likely to me that markets are going to become more volatile. When financial market volatility significantly exceeds the volatility of the underlying fundamentals, large sectors of the economy become very exposed. In this environment business survival in all possible circumstances (and some that mightn’t be imagined) should be the key concern in corporate planning. Planning to be in business is not as fashionable as projecting growth, but knowing you are going to get to your destination in one piece is better than hoping you are.
View the article at Highgrade.net (Login Required)