Analysis
5 Mar 15

Enjoy cheap fuel, but keep your eye on the big picture

Falling fuel prices – how can that be a bad thing? But fleet managers know that even good news comes with its own difficult questions. Like: How does cheaper fuel impact TCO? Are prices likely to remain low? And should fleet strategies change because of them? The short answers: Not as much as you think, Not forever, and Not at all!

Since the middle of 2014, oil prices have dropped by almost half, and are currently hovering at around $50 per barrel, a price level unseen since 2009.  

14% cheaper

That downward slide is the result of a complex set of causes, the most prominent of which is OPEC's decision to maintain high production levels, in order to maintain market share. Others include the low growth predictions for Europe and China, which consequently will consume less oil; and the shale oil boom in the US, which has made it virtually energy-independent.

With some delay, as always, fuel prices have gone down as well. Average diesel prices in Europe declined by 7% in 2014, while petrol got 5% cheaper. Over the last three months, diesel declined 13% and petrol 14% in Western Europe (In the US, 16% and 30% respectively).

For an international car fleet of 6,000 cars, 80% of which are diesels, those fuel cost savings amount to €1 million. If, as the US Energy Information Administration predicts, fuel prices will go down by another 10% this year, that same fleet will generate an additional €1.5 million in fuel cost savings – or about 3% of its entire fleet spend.

Short run

UK customers of Alphabet, to name a concrete example, saved €14.4 million on fuel from September to January, on a total fleet of 131,000 vehicles.

Those savings are confirmed by a number of multinational fleet managers polled for this article. For them, fuel cost typically represents 25 to 30% of TCO, at least in mature markets like Western Europe. It can be as low as 10% of TCO in Eastern Europe and other markets where fuel is inherently cheaper.  

Some fleet managers point out that fuel cost savings, while offering welcome room for investment in equipment and training, should not be over-emphasised: they have little effect on, and are relatively small compared to, the non-fuel elements of TCO.

On the other hand, some companies do admit a very direct consequence of lower fuel prices on their fleets: the acquisition of less economical, higher-emitting vehicles, as lower fuel prices make them cheaper, at least in the short run.

Long term

So, is the paradigm of fleet management about to move away from the emphasis on cleaner engines, and greener alternatives? Not likely. Oil prices might remain low for now, but nobody can foresee how prices will evolve in the short term: there are too many factors at play, including armed conflicts, technological developments and inherent demand.  

The picture is clearer in the long term. Since 2005, the worldwide number of vehicles has increased 35%, but the supply of fuel has risen only by 12%. As lower oil prices discourage further exploration for new sources, this discrepancy is likely to grow. And that makes future price rises all but inevitable.

This prospect should steel fleet managers' resolve against opting cheaper, less economical vehicles. And indeed, they're not abandoning the pursuit of cleaner, greener cars – nor indeed are the manufacturers, for the same two reasons. One: cleaner engines consume less fuel, so cheap fuel makes them even cheaper. And two: the commitment to lowering CO2 emissions is reinforced by high fuel prices, but ultimately independent of it.

So what are fleet managers to do in this brave, new and temporary world of low fuel prices? The best option is to keep an eye on the big picture – price rises over the long term – and remain focused on reducing CO2 emissions and fuel usage. Just like their drivers. Today's lower fuel prices have not undone the mentality shift in drivers, who now actively seek out smaller, more economical cars, and see the benefits of electric, hybrid and other post-fossil engines.

Authored by: Frank Jacobs