How “Ratability” is key in negotiating a fuel supply contract

Welcome to the third installment of our seven-article series covering best practices to incorporate into your business for improved fuel management. Our team of industry experts are committed to sharing insights and strategies that will help you mitigate your exposure to market volatility, effectively manage fuel contracts, and make informed decisions regarding your fuel purchases and sales.  

In this installment, we explain what ratability is, how it is key in negotiating a fuel supply contract, and how you can use it to your advantage. Read part two on the significance of having access to intraday pricing to help you stay ahead of critical market shifts.

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What is ratability?

In the fuel buying and selling world, the biggest “number” – what many call “the money number” – is how much fuel you buy or sell each year. Knowing that number and being transparent about it is the difference between writing a good supply contract and a bad one.

When you buy a house, you want to know the total square footage is or the inspection results. When you buy a new car, you probably do some homework on the true-blue book base line dealer cost, so you do not overpay. With fuel, knowing how much you buy or sell each year – referred to as RATABILITY – is the base number to begin a negotiation.

Having taught fuel buying classes for many years, I am always amazed at how few companies really know how “ratable” they are. Even worse, many who know their ratability do not use it to their advantage. 

Ratability is a measurement – in gallons – of how much fuel is bought or sold in a year. It is the number buyers should always know, and it is the number that sellers will ask for before starting a fuel supply deal negotiation.

What does that mean for me?

Your “ratability” affects what you pay, and it also defines the kind of relationship you will have with suppliers. 

Buyers and sellers of fuel look at ratability differently, but here is the bottom line – the more gallons of fuel you buy or sell, the more ratable you are.

That’s key, and here’s why: the more ratable you are as a fuel buyer, the more important your business is to your supplier.

Fuel distributors want and need large customers – Why? Because it makes them more ratable to THEIR suppliers. When a fuel distributor goes to negotiate his contract, he will use his ratability – which you contribute to – as a key negotiating tool.

The fuel supplier needs to sell fuel – for them, fuel is their business. It is a revenue center. For the average fuel buyer, fuel is a cost, like insurance or office equipment. It is a cost center. Fuel suppliers must be in the market everyday – 365 days/year. Because fuel is such a volatile commodity, the dollar value of what is sitting in a tank can change in a heartbeat. Sellers need to move fuel constantly – they need ratable buyers like end users, gasoline retailers, or government agencies to buy from them. 

That’s why ratability is so important for both sides. 

Is there a "ratability scale?"

There’s nothing official, but here is a quick guide you can use to gauge your ratability, along with some thoughts:

• 1 million gallons/year or less – considered very small, non-ratable
• 5 million gallons/year – small to medium, somewhat ratable
• 5 – 15 million gallons/year – medium-sized buyer, considered ratable
• 15 – 40 million gallons/year – larger buyer, considered very ratable
• 40 – 100 million gallons/year – very large buyer, considered very ratable
• 100 million gallons/year or more – super buyer, considered extremely ratable

At the end of the day, knowing your ratability and whether it is getting larger or smaller is critical. When you sit down to negotiate a fuel contract – and if you are in the 5-million and higher bracket, you should have a contract – your negotiating power will hinge exclusively on that number.

But be careful – do not overestimate your ratability. That bravado could cost you dearly later. Why? Because if you overcommit in a contract and underperform, you will get socked with under lifting penalties that could become very costly during a fuel supply agreement.

On the flip side, it is important not to UNDERestimate. Assess your fuel buying needs, and if you see them growing, try to work with your supplier on flexibility. If you need to increase liftings, your contract should allow you a certain percentage above what you commit to. If you do not factor this in, you could get hit with OVERlifting penalties for each gallon you lift above what was agreed.

Negotiating contracts is not easy – but if there is a takeaway from this, it is to know your annual fuel volumes, or ratability.

Let Argus help you manage the complexities of the unpredictable and evolving road fuels market.

For additional information about Argus’ downstream services or to request a free trial, visit Argus Spot Ticker. You can also contact us at USdownstream@argusmedia.com with questions or to speak to an industry expert.