Boston Herald

MBTA $12.6M over fuel budget due to spiking diesel prices

Spiking fuel prices driven by Russia’s invasion of Ukraine has put a wrench in the MBTA’s budget projections for the current fiscal year, which ends on June 30.

MBTA Treasurer Pat Landers told the T’s Audit and Finance subcommittee Thursday morning that the year-end fuel cost for its commuter rail and buses in Fiscal Year 2022 is expected to be $48 million, which is $12.6 million more than what it had budgeted for.

Landers attributed the higher-than-anticipated cost to a volatile market, with “Russian oil being a huge factor” in spiking fuel and diesel costs.

“The variation in crude prices is still very volatile,” said Landers. “Over the last few days, (it’s) gone from $111 down to $98, and at the moment, it’s riding at about $105.”

Landers said the MBTA has been able to offset some of that volatility through its diesel fuel hedge with Morgan Stanley, which was for $1.98 per gallon.

“We will offset some of the fuel prices by about $7.6 million by the fuel hedge we put in place last year,” said Landers.

The T has historically hedged the costs of its diesel fuel to minimize its expenditure volatility, and to provide greater certainty in budgeting. Landers said the agency typically aims to hedge about 50% of its diesel usage each year.

The way the fuel hedge works is simple. If the price of fuel goes up, the bank pays the MBTA. If prices go down, the T pays the bank on the hedge, Landers said.

“The purpose of these hedges is to increase budget certainty,” said Landers. “What it’s not is we’re not trying to outsmart the market or gamble. It’s really a safety play here.”

For FY23, Landers said the MBTA is budgeting for 19.68 million gallons in fuel purchases between its commuter rail and bus system.

The Audit and Finance subcommittee voted unanimously Thursday to hedge 50% of its budgeted usage for FY23, or 9.8 million gallons.

Unhedged, the agency could be exposed to $17-$34 million in budget volatility. A 50% hedge would reduce that figure to $8.5-$17 million, Landers said.

“I think this is a very prudent and sensible approach,” said Betsy Taylor, subcommittee chair. “It is designed to reduce volatility of a highly volatile commodity.”

The MBTA will now enter into a competitive bid process.

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