Political turmoil in key energy producers such as Venezuela and Iran has underlined a challenge for chief financial officers. Volatile oil and gas markets put finance bosses in a double bind. Hedging strategies can backfire and introduce additional accounting complexity. However, if done right, they offer clarity amid uncertainty.
Geopolitical flashpoints in key oil‑producing nations have once again exposed the challenge in forecasting energy prices. Venezuela, home to the world’s largest proven crude reserves, has the potential to boost supplies to the global market after a US intervention toppled its leader Nicolás Maduro, and US President Donald Trump promised billions of investment dollars to revive flagging production there. On the other hand, the political tumult in Iran, the world’s seventh-largest pumper of crude, has rekindled worries about supply disruptions.
‘Hedging instruments can trigger hefty accounting impacts’
For CFOs and finance leaders, this dynamic presents a persistent paradox: energy costs are too material to ignore for many businesses, but prices are too unpredictable to forecast reliably. Natural gas markets have shown similar turbulence in recent years as geopolitical shifts, not least following Russia’s invasion of Ukraine and consequent supply realignments, have upended flows and pricing structures. The result is a Gordian knot of uncertainty. Spend heavily hedging against rising prices and the market may fall, leaving executives open to criticism for acting prematurely. Do nothing, and a sudden spike can erode margins and undermine investor confidence.
This is the practical tension at the heart of corporate energy price risk management.
A deeper dilemma
For many finance leaders, the challenge goes well beyond choosing a hedging instrument. Michael Salcher, head of energy and natural resources at KPMG Germany, emphasises that hedging introduces accounting complexity that CFOs simply cannot afford to overlook.
‘Hedge accounting is not a silver bullet and it can be expensive,’ Salcher says. Financial instruments such as futures, swaps or power purchase agreements often trigger fair value accounting impacts that can cause swings in both earnings and balance sheet positions from one reporting period to the next. For companies unfamiliar with the intricacies of IFRS 9, the international standard governing hedge accounting, those fluctuations can be jarring.
Salcher points out that some CFOs and COOs can be tempted to sign energy contracts focused on economic outcomes without fully appreciating the consequences for their financial statements. These unintended accounting impacts can distort reported performance, complicate stakeholder communications and even affect compliance metrics.
This gap in expertise, particularly in hedge accounting and fair value measurement, is not a niche problem. ‘We often see a serious skills gap in accounting and controlling departments,’ Salcher says. For many businesses, the shortage of seasoned professionals who understand derivative valuation, documentation standards and effectiveness testing under IFRS 9 is a major operational risk and represents a growth opportunity for accountants willing to specialise in this area.
‘Hedging isn’t about forecasting prices but managing exposure’
To hedge or not to hedge
The fundamental misconception about hedging is that it is about predicting where prices will go. Paul Smith, executive vice president of business development at Mobius Risk Group, which advises CFOs on hedging strategies, frames it differently. ‘No one can reliably predict prices, whether spot or across the forward curve,’ he argues. ‘Hedging isn’t about forecasting prices but about managing exposure, setting clear thresholds where price movements would materially harm the business and structuring risk instruments to protect against those scenarios, many times buying a cap and selling a floor against it to make protection affordable and sustainable.’
From this perspective, he adds, hedging is a strategic tool, not a speculative play. ‘It can stabilise cashflows, protect against downside risk and ensure continuity in planning, budgeting and capital allocation. But it also requires rigorous governance: clear policies, documented risk tolerances and oversight from cross‑functional committees that can articulate the rationale behind hedging decisions to boards and investors alike.’
It is not a treasury issue alone but a business‑wide strategic concern
Salcher agrees that governance matters. In many companies today, hedging programmes that were once the preserve of treasury desks are now reviewed by broader risk committees involving finance, procurement and sustainability functions. This reflects the reality that energy cost volatility is not a treasury issue alone, it is a business‑wide strategic concern.
Value of diversification
Geopolitical shocks bring lasting lessons. The disruption of European gas supplies following Russia’s 2022 invasion of Ukraine underscored the limitations of relying on a single energy source or supplier. Companies that had hedged portions of their gas exposure fared better than those entirely exposed to spot prices, but even then, the outcomes were complex. Many businesses found that the sheer scale of price movements outstripped conventional hedging structures, and accounting treatments amplified the impact of those moves on reported results.
Salcher highlights diversification of energy sources and suppliers as a broader resilience measure. Increasingly, firms are considering investments in on‑site generation, renewable energy procurement and alternative fuels to reduce dependency on volatile markets. These operational levers can complement financial hedges by reducing overall exposure to any one factor.
Skills gap – and opportunity
Hedge accounting under IFRS 9 demands a blend of technical proficiency and strategic acumen. It requires the ability to assess risk, document hedging relationships, test effectiveness and translate volatile fair value movements into coherent financial narratives.
Salcher is blunt about the current state of play. Only a small number of professionals in Germany have deep experience navigating these complexities, he says. At the same time, demand for such expertise is rising, not just among large industrials but also among public utilities and mid‑sized companies suddenly exposed to energy price risk.
Those with deep skills in hedge accounting can add enormous value
For accountants, controllers and finance leaders, this represents a strategic opportunity. Those who cultivate deep skills in hedge accounting and energy risk measurement can add enormous value, helping their businesses to manage risk, stay compliant and communicate effectively with stakeholders.
Hedging will never eliminate risk, nor should it be treated as a short‑term fix. But in markets where prices defy prediction and geopolitical uncertainties loom large, savvy risk management, backed by strong governance and accounting expertise, is essential. For CFOs and finance teams, the choice today is not whether to engage with energy price risk but how to do so in a way that protects operations, satisfies accounting standards and positions the business for long‑term resilience.
