Timing, luck yield bargain fuel

October 05, 1990|By Jon Morgan | Jon Morgan,Evening Sun Staff

In some surrounding counties, it's like the good old days with cheap gas never ended.

In Anne Arundel County, for example, the school system is in the final few months of a one-year contract for unleaded gasoline at about 59 cents a gallon and heating oil at 63 cents a gallon.

The Baltimore County Public School system and government is running buses, cars and gasoline-powered trucks on fuel costing as little as 85 cents a gallon, thanks to some contracts it signed just before Iraq's invasion of Kuwait.

Harford County government will pay 82 cents a gallon for gasoline through 1994.

Through a combination of lucky timing and a desire to smooth out swings in their fuel bills, these jurisdictions locked in low prices on fixed-price contracts during the cheap energy days of the past few years.

Other government buyers who were not so lucky point out that such deals work both ways: When prices drop, the organizations holding fixed-rate contracts can spend more than they need to.

Contracts with specific prices were common before the oil disruptions of the 1970s, but then suppliers and users began relying on contracts with prices that "float" with an agreed upon benchmark. Usually, the price is set with each delivery.

"Our timing was real good," said June Coleman, purchasing agent for the Baltimore County Public School system.

She read in a trade journal earlier this year about some school districts in other states locking themselves into fixed-price fuel supply contracts. She and her bosses kicked around the idea and decided to accept fixed-price bids in addition to the floating-price bids that the school system usually used.

"We just decided why not try a firm, fixed price. We had no idea what the situation would be," Coleman said.

A pair of one-year gasoline contracts were signed in June for 66 cents a gallon and 69 cents a gallon. The system entered into the contracts along with the county government to supply about 4 million gallons of gasoline. A similar contract for about 4 million gallons of heating oil was officially awarded Aug. 2, the day Iraq's tanks rolled into Kuwait and drove up the price of fuel worldwide.

That deal may be challenged in court by the supplier, but Coleman said the oil is currently flowing at the agreed-to price. Coleman said she and her bosses have joked about selling their gas at a profit.

Elsewhere in the region, governments are paying wholesale prices of more than $1 a gallon for gas. In Carroll County, for example, the floating-rate contracts in place are now providing unleaded gas for $1.23 and diesel and heating oil for about 92 cents a gallon.

"We didn't go with that [fixed-price] option a year ago when it was offered to us because we were buying it cheaper at the time. But then we didn't anticipate Hussein's invasion, but I don't think anyone did," said James Doyle, fleet manager for Carroll County.

Baltimore has the volume to support low prices, but its floating rate is now at $1.08 and heating oil is 86 cents a gallon. The city uses about 8 million gallons of heating oil and 4 million gallons of gasoline a year.

The city was in the process of filling up its 1-million-gallon heating-oil tanks when the invasion sent prices soaring. But most of the oil was bought at about 75 cents a gallon for those tanks, said Bernard Crew, fuel buyer for the city.

"If the price goes up, you look good. But if it goes down, you don't look too good," Crew said of fixed-rate contracts. The city is banding together with several area jurisdictions to buy fuel through a regional association, hoping the bigger volume will result in greater discounts.

Baltimore County's gas agreements allow for either party to back out after six months.

But one of the gasoline suppliers, Louis Dreyfus Energy Corp., has no plans to cancel, said Art Benson, a senior vice president at Dreyfus' marketing headquarters in Bel Air.

"We're making plenty of money on it," Benson said. His firm contracted with suppliers to provide the fuel at a profit to everyone. Even though the profit would be higher now, he said such "future" contracts are designed to limit risk for all parties.

F.G. "Bud" Holecheck, procurement director for Harford County, said, "It's pure luck. You take a risk."

Harford, whose purchases are separate from its school system, has for several years used fixed-rate contracts. A few years ago, it was caught in a falling market and ended up paying above the going price.

Anne Arundel County's floating-rate contract has it paying $1.20 a gallon for unleaded gas, and $1.16 a gallon for heating oil. The Anne Arundel school system, however, has fixed-price contracts that expire in November and December and are now providing unleaded gas for 59 cents a gallon, and heating oil for 63 cents.

But James Ryan, purchasing agent for the county, said he still thinks such arrangements are the best in the long run.

"In normal times, you probably end up paying more" with a floating contract, Ryan said.

Buyers for the state considered a fixed-price contract this summer, before the invasion, but rejected the idea in favor of floating rates.

Frank Richardson, senior buyer for the state, said fixed rates were difficult to justify under the state's procurement criteria.

The state, which spends about $20 million a year on petroleum products, is paying 97 to 99 cents a gallon for unleaded gasoline, and 80 to 90 cents a gallon for heating oil.

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