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Fleet managers – lap up the fuel-good feeling!

Low fuel prices are great for fleets. But account for every drop - it won’t be this cheap forever, writes James Hookham, Managing Director – Membership & Policy at the UK’s Freight Transport Association

The sustained drop in fuel prices over the past nine months (to February 2015) has been welcomed by consumers, businesses and economists the world over. Even politicians have been getting in on the act, eager to associate themselves with voters getting the feel-good feeling that comes from realising it costs about £10 / US$15 / €14 less to fill their car than it did this time last year.

For most fleet managers, the fall in fuel prices is welcome as their budgeted cost line will show a healthy positive variance for the year. Hauliers with open book contracts or fuel escalation clauses will be sharing this saving with their customers eventually, but the reduction by a third of the biggest overhead in a fleet after labour can only be seen as a positive development.

Except, that is, for those who signed a contract to guarantee the price of their fuel at prevailing rates in the first half of 2014. In which case, they may well be contractually tied to paying fuel prices possibly as much as a third more than their competitors! The hedging of fuel prices is effectively a bet against the market. It is a precarious business needing dedicated and knowledgeable people well versed in commodity market trading techniques. This is only worth it if buying very large volumes of fuel for delivery across wide geographic areas for several thousand vehicles. The only smaller fleets doing this are those that are part of a high intensity energy utilising manufacturing business, where fuel for the vehicle fleet is being bought as part of much bigger trades for the main production processes.

Are US$50 oil prices a megatrend, likely to last for ten years? Unlikely – so enjoy it while it lasts. The price fall has already bottomed out, and some smart money is now betting that oil prices will start to rise. The trouble with all these predictions is that the market is responding to far from normal events, so there is no reliable precedent to follow.

The two main reasons for the drop in prices in 2014 were the decision by Middle East producers (OPEC) to keep production levels high despite a drop off in demand due to a slow-down in the world economy and the rapid substitution of crude oil products with shale gas, particularly in the USA. Both factors created an excess of supply over demand that would normally be countered by restricting production, keeping the price high. It was OPEC’s decision not to do this in the autumn of 2014 that turned the price dip into a slump and has so unnerved smaller exporting nations and the oil industry in general. None of these factors are permanent, and could be reversed as quickly as they emerged. Market observers are expecting prices to recover to about US$70 by the end of 2015, but to remain under US$100 for the medium term.

The real megatrends underlying the price of crude oil, however, have not fundamentally changed. New oil discoveries are proving just as difficult to reach and expensive to recover as they were – think Alaska, Arctic Ocean, Western North Sea; and the more geologically accessible supplies are still located in some of the most politically unstable parts of the world, such as Iraq, Iran, Syria, North Africa, Russia and Nigeria. The depths of the geological formations in which new reserves are being found require new and very expensive technology to bring them to surface. Most of these reserves require a price of at least US$70 a barrel to make them economically recoverable, and many were barely profitable at 2014 prices. Geologists say there is enough oil in the ground to meet all foreseeable demand. What is in doubt is whether it can be recovered at a price people are prepared to pay.

On top of this is the possibility of the introduction of carbon taxes by governments to discourage the use of hydrocarbon fuels to meet greenhouse gas emission targets, an issue strangely silent in the current cheap oil debate.

So, how should fleet managers responsible for fuel procurement approach this critical cost line in their budget in the longer term? The key message is to make fuel management, from procurement to consumption, a key management priority and to see through the noise to understand the real market signals.

First, there is a presumption that a fall in oil price will immediately be reflected in an equally big fall in the forecourt price. The two benchmark prices quoted in the press (Brent Crude and West Texas Intermediate) are in fact forward prices for deliveries of oil in three months’ time. So gasoline and diesel selling on the forecourt today was in fact refined from oil bought at prices that prevailed up to six months ago, allowing for refining and distribution time. There will thus inevitably be a lag between plunging oil prices and the delivery of product refined at that price.

Second, understand that the refining and distribution of automotive fuels follows its own rules of supply and demand. Diesel is often blended from refined products that are also feedstocks for other processes and markets. Competing demand for these may well influence diesel prices independently of crude oil prices and on a regional basis.

Third, track the price at source and shop around for deals, just as for any other energy supply. One reassuring trend is that prices reported by members of the UK’s Freight Transport Association for bulk delivery of diesel fuel in the UK show a close correlation to the main benchmark price quoted on the European market, allowing for delivery and handling costs. Much of the reported variability in fuel prices seems to be happening in the retail market downstream of bulk purchase, often influenced by the pricing strategies of major retailers. In the UK, those major retailers now own about half the fuel nozzles on the country’s forecourts.

The message, then, is clear: where practicable, source bulk supplies at wholesale prices, either direct to your own storage or into a shared bunker scheme. Stay on top of developments with a good price index; keep up to date with a good market monitor; and take the purchasing of fuel every bit as seriously as its usage by drivers and consumption in vehicles. Account for every drop – it won’t be this cheap forever!

 James Hookham

This article appeared in the Q1 2015 issue of Automotive Megatrends Magazine. Follow this link to download the full issue.

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