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The Car and Truck Fleet and Leasing Management Magazine

2015 Fleet Fuel Spend Analysis & 2016 Forecast

November 2015, by Mike Antich - Also by this author

Fuel is the largest component of total fleet operating costs. The stability of fuel pricing over the past 24 months has been the No. 1 factor contributing to keeping fleet operating costs flat. Not only that, but lower fuel prices have helped decrease overall fleet expenses.

“Lower fuel prices have led to a significant reduction in fleet spend over the past 12 months,” said John Bauer, manager, fleet analytics at Wheels Inc.

There has been a double-digit percentage decline in nationwide average pump prices for both diesel and gasoline.

“From January 2015 to September 2015, versus the year prior, the average cost of diesel fuel decreased approximately 19.8 percent and gasoline prices have also decreased 23.2 percent,” said Dale Jewell, director, North American maintenance operations for EMKAY.

At A Glance
  • The stability of fuel pricing over the past 24 months has been the No. 1 factor contributing to keeping fleet operating costs flat. 
  • The difference in price between diesel and gasoline is nearly indiscernible in some markets. 
  • The U.S. Energy Information Administration (EIA) projects that U.S. pump prices will decrease slightly in 2016 as compared to 2015. 
  • The oil futures market seems to reinforce the contention that oil prices will continue to remain flat. 
  • The global inventory of crude oil continues to exceed current user demand, which will exert downward pricing pressures. 

As with most commodities, fuel prices fluctuate, driven by seasonal driving demand and weather conditions.

“Fuel prices have helped fleets reduce cost on a year-over-year basis. To date, the average price for regular unleaded has declined 83 cents from the 2015 average of $3.36. This represents a 25-percent savings; however, during 2015, prices have followed a familiar seasonality curve and are currently 14-percent higher than the beginning of the year, on average,” said Steve Jastrow, strategic consulting manager for Element Financial Corp.

However, plummeting prices at the pump have been a double-edged sword for many fleet customers over the past 12-18 months.

“On the one hand, lower retail prices for both gasoline and diesel have been a welcome relief for fleets that, in some cases, have seen their costs reduced by 25-30 percent. On the other hand, industries directly or indirectly attached to the price of oil (upstream to downstream) have experienced a real squeeze in revenue and cash flow,” said Steve Durdin, manager, garage management systems (GMS) & fuel programs at ARI.

Truck Fleets Benefit the Most

The largest beneficiaries of reduced fuel prices have been diesel-powered fleets, resulting from the significant narrowing in the gasoline versus diesel price gap. “The difference in price between diesel and gasoline is nearly indiscernible in some markets,” said Durdin of ARI. “While this pricing gap may widen as temperatures fall, diesel buyers have enjoyed an even greater price break over much of the year.”

A similar observation was made by Merchants Fleet Management about the impact of lower fuel prices on light-duty truck fleets.

“The price of fuel has dropped about $1 or about 4 cents per mile over the past year. With historically higher fuel prices, the mpg of light-duty trucks made them prohibitively costly compared to more efficient alternatives. This year’s lower fuel costs created an upward trend in resale values, resulting in a lower cost per mile and making this vehicle classification more affordable to operate,” said Michael Singer, strategic consultant for Merchants Fleet Management.

It is well documented that fuel prices influence vehicle acquisition decisions in the retail market, which some fleets are using to their advantage.

“New- and used-vehicle markets tend to react to fluctuations in fuel prices. When prices are low, consumers may be more willing to consider larger, less fuel-efficient vehicles,” said Zingha Lucien, strategic consulting manager at Element Financial Corp. “Therefore, we are seeing some fleets using this opportunity to sell their older gas guzzlers and replace them with newer, fuel-efficient vehicles. That way, fleets lower their depreciation expenses and at the same time improve the fuel efficiency of the fleet. This will be beneficial to the organization in the long term — especially if the trend reverses and fuel prices increase in the future.”

Total Consumption vs. Price

One welcome relief to this multi-year period of fuel price stability has been the minimization of unpredictable pricing volatility that resulted in unanticipated price spikes that ravaged fleet budgets in past years.

“With domestic production at high levels and the need to import trending downward, outside factors are less likely to have an impact on fuel prices than we’ve seen in a long time. For that reason, it is likely that fuel costs will have a negligible impact in how companies select the vehicles for their fleet,” said Singer of Merchants Fleet Management.

With fuel prices remaining flat or depressed, the current impact of fuel cost on fleet budgets is driven by total consumption rather than per gallon cost. For a variety of reasons, fleet fuel consumption decreased in 2015. One example supporting this assertion is illustrated by the vehicle portfolio of EMKAY.

“Total gallon consumption has decreased 22.4 percent for diesel and 8.2 percent for gasoline. Current fleets in the EMKAY portfolio have further utilized newer vehicle technologies, implemented appropriate driver behavior measures, and right-sized their fleets,” said Jewell of EMKAY.

Another factor driving acquisition decisions, especially at multinational companies, is corporate sustainability initiatives. “The reduction of carbon footprint goals are leading to an increase in fuel efficiency and a decrease in overall fuel spend,” said Bauer of Wheels Inc.

Fuel-Spend Reduction Strategies

There continues to be the normal seasonal cyclicity in fuel prices in the fall and spring, but the key factor is that this pricing cyclicity does not have an upward trajectory and prices are behaving very similar to those in 2014. However, one factor with a growing impact on moderating fuel spend is the overall increases in vehicle fuel economy. A variety of acquisition decisions are contributing to increased average fleet fuel economy and reduction in overall fuel consumption.

“Fleets are right-sizing their vehicle selectors to take advantage of fuel-efficient technologies, weight-reduction measures, higher-speed transmissions, and appropriate drivetrains to meet their business necessity,” said Jewell of EMKAY. “Furthermore, the importance of driver behavior is essential. According to the EPA, a driver can impact fuel efficiency as much as 33 percent. The implementation of driver behavior trainings to reduce speeds, idling, accident avoidance, rapid deceleration, etc., continue to gain momentum within the industry. When paired with technological GPS solutions, route optimization can reduce miles driven, scheduling, speeds, and personal use,” added Jewell.

During the collection of this year’s data, it was noted that the trend to downsize is waning, with telematics moving into ascendency.

“Fleet migration to smaller displacement engines is slowing from prior years, as clients have exhausted options around vehicle selection within required segments or for specific fleet applications. The frequency of fleets looking to telematics as the next lever to pull to find additional fuel savings is increasing,” said Becky Langmandel, director of strategic modeling and analytics research team for LeasePlan USA.

Other fleet strategies are also being employed to reduce a company’s fuel spend.

“Fleets continue to be aggressive in seeking ways to reduce the price of fuel. There continues to be strong interest to aggregate spend and maximize rebates with retailers. This continues to be a challenging initiative due to the complexities of influencing driver behavior and ever-changing retail pricing,” said Jastrow of Element Financial Corp.

Many believe that the current stability in fuel prices may be short lived and, ultimately, fuel prices will start an upward trajectory. This has caused some fleets to investigate fuel hedging, which is a contractual tool used to reduce exposure to higher fuel costs by allowing a company to establish a fixed or capped cost.

“The interest in learning more about hedging has also increased because it provides an opportunity to make fuel prices more predictable and avoid budget impacts due to sharp price increases. Unfortunately, the current complexity to create a hedging program often prevents action,” said Jastrow of Element Financial Corp.

In the final analysis, a good fuel management program, as in a good football strategy, focuses on “blocking and tackling.”

“Whether retail prices are at all-time highs or lows, the basics behind effective fuel-cost management remain the same,” said Durdin of ARI. “In fact, a soft market presents even greater opportunity for savings when fleets are focused on understanding their fuel expenses and controlling costs. Fleets, large and small, should focus on a written and well-communicated fuel management policy to make sure drivers and fuel card users understand the expectations around card use and fuel conservation. That underlying expectation should then be accompanied by constant monitoring of mpg and cost-per-gallon performance across asset types, along with a focused effort on creating as much visibility as possible around transactions and spending trends at the driver level,” added Durdin.

Another fundamental is a fuel card program, which provides a number of built-in mechanisms to monitor and control fuel spend.

“Fleets are using fuel cards with at-the-pump discounts and rebates, mobile apps, which assist drivers in navigating to lower-cost fueling stations, and, where possible, are moving towards high mpg and/or alternative-energy vehicles,” said Singer of Merchants Fleet Management.

New technology, in particular in the area of fleet analytics, shows much promise in helping to further evolve fuel management strategies.

“Innovation in analytics continues to provide the best opportunity to help fleets identify opportunities to reduce fuel expense. It will be exciting to see these tools evolve to help fleets improve driver purchase decisions,” said Jastrow of Element Financial Corp.

Forecast of Fuel Prices in 2016

All fleet management companies base their fuel price forecasts on those projected by the U.S. Energy Information Administration (EIA).

“The EIA currently projects that U.S. pump prices will decrease slightly in 2016 as compared to 2015,” said Lucien of Element Financial Corp. “Their October Short-Term Energy Outlook includes forecasts for gasoline and diesel of $2.42 and $2.72 per gallon, respectively, for 2015. ‘Lower economic growth in emerging markets, expectations of higher oil exports from Iran, and continuing growth in global inventories’ are cited as the main reason behind the projections. The EIA gasoline pump price outlook in 2016 is 4 cents per gallon below the 2015 projections. The cost of diesel is expected to increase by 5 cents to $2.77 per gallon.”

Jewell of EMKAY provided additional detail to the EIA forecasts.

“The EIA forecasts that Brent crude oil prices will average $54 per barrel in 2015 and $59 per barrel in 2016. Forecasted West Texas Intermediate crude oil prices average $4 per barrel lower than Brent price in 2015 and $5 per barrel lower in 2016. The EIA expects monthly gasoline prices to decline to an average of $2.03 per gallon in December 2015 and regular gasoline prices to average $2.38 per gallon in 2016. The EIA further explains that the continuing increases in global liquids inventories have put significant downward pressure on prices. Inventories rose by an estimated 2 million barrels per day through the first three quarters of 2015, compared with an average build of half-a-million barrels per day over the same period in 2014. However, global liquid fuels inventory builds fell to an estimated 1.2 million barrels per day in September. Inventory builds are projected to slow in the coming months, but they are expected to remain high compared with previous years,” said Jewell.

Another indicator of future fuel prices is the oil futures market, where investors buy future oil contracts based on anticipated prices as a form of hedging or as an investment to sell at a future date if actual prices are higher. The oil futures market seems to reinforce the contention that oil prices will continue to remain flat.

“Crude oil futures quotes on the New York Mercantile Exchange suggest fuel prices will range from $44 to $51 per barrel through the end of 2016,” said Bauer of Wheels Inc. Another key indicator is that the global inventory of oil continues to exceed current user demand.

“All indicators seem to point to the fact that retail prices for both gasoline and diesel will remain soft through the balance of this year and most of 2016. On the very basic level of supply and demand for oil around the world, it appears that inventories will remain on the higher side for the immediate future,” said Durdin of ARI.

One advantage to the U.S. is that oil prices are denominated in U.S. dollars.

“This fact, combined with the strength of the U.S. dollar, would seem to give a lot of support to pump prices staying on the low side of the spectrum compared to the last several years,” said Durdin. “Of course, it is important to note the volatility of many factors that can quickly send oil prices in one direction or the other. For example, weather-related events and geopolitical news in many areas around the globe can send prices reeling. Fleets should maintain a consistent, measured approach to fuel consumption and costs to help ensure they are always bettering the market, regardless of where prices may land.”

What is the forecast for per gallon fuel prices in calendar-year 2016?

“Industry experts rely primarily on the U.S. Energy Information Administration to forecast fuel costs. The forecast is adjusted for seasonal patterns but currently ranges between $2 and $2.50 per gallon over 2015,” said Paul Fortin, economist and vice president of strategic modeling and analytics research team for LeasePlan USA.

The forecast of continued flat fuel prices will also be a factor influencing 2016 and 2017 model-year acquisition decisions.

“We see the cost of fuel continuing to trend downward through the end of 2015 and seasonal upticks in 2016. The likely impact is that fleet managers will continue to select the vehicles that make the most sense for their utilization needs. The lower trending fuel costs allow them to better balance decisions at an application level rather than from a strictly cost perspective,” said Singer of Merchants Fleet Management.

One consequence to lower fuel prices has been a decreasing interest in hybrids and alt-fuel vehicles.

“With pump prices currently averaging $2.28 per gallon, we continue to see a decline in client interest for hybrids and other alternative-fuel vehicles during the vehicle selection process in 2015. Our clients understand that some of the non-fuel total cost of ownership variables will offset the fuel savings,” said Langmandel of LeasePlan USA. “With transaction prices often higher for hybrids and alternative-fuel vehicles, depreciation is inversely correlated to fuel prices and therefore lower fuel prices equates to higher depreciation for alternative-fuel vehicles. However, since fuel cost is still one of the top contributors to the overall operating cost per mile, fuel economy for internal combustion engine vehicles remains a top focus during the vehicle selection process.”

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