McKinsey & Company, the top-tier strategy consulting firm, recently released a study on the likelihood and potential impact of another oil price spike. While no one can predict the future price of oil, the study raises important points to consider for executives with oversight of or direct management of fleet transportation. I want to highlight two points: 1) there are very plausible scenarios that could cause another oil price spike in the next 5 years, so the time to take action is now; and 2) by taking action to reduce fuel consumption, you will not only save money now, but will also create a cost advantage over your competitors who wait for prices to spike before taking action. I will take some of McKinsey’s thoughts one-step further and run some numbers on how reducing fuel consumption in your business fleet provides your company real cost savings that could be a strategic advantage.
The price of oil (and the price of fuel) continuously fluctuates and is incredibly difficult to forecast because the price is set in a global oil market, where global demand and supply shifts without warning, influenced by floods, weather, wars, etc.. Fuel prices are also affected by regional markets, where refining capacity, local economies, and state taxes cause additional layers of complexity. Given that there is considerable uncertainty but also a real risk of oil / fuel prices spiking again, fleet managers and executives in companies should start to think now about reducing exposure to conventional fuel price volatility. The best way to do that is to take steps that reduce fuel consumption in your fleets by increasing overall fleet efficiency.
Let’s put into perspective what happens to fuel costs during an oil price spike, using a large fleet of vans and trucks as an example. A hypothetical delivery fleet has 1,000 vehicles which operate in and around urban areas to service customers. If the fleet fuel economy average is 12 mpg and the vehicles average 20K miles per year, the total fleet is using (20,000 mpy / 12 mpg * 1000 vehicles) = 1,666,667 gallons of fuel per year. If we assume the fuel is all gasoline today, that works out to a fuel cost of about ($3.60 per gallon * 1,666,667 gallons) = $6,000,001. If fuel prices spike a dollar to $4.60 per gallon, fuel costs have risen to $7,666,668, a 27.8% increase or $1,666,667 each year!
Now, let’s suppose that this company takes steps today to increase fleet efficiency. Suppose that 50% of the fleet is a good candidate for a more fuel efficient option, and this 50% gets replaced or repowered (before this oil spike happens), while the remaining fleet stays at the 12 mpg average. The more efficient option improves its vehicle’s fuel economy by 25% to 15 mpg. The newly efficient fleet now consumes (1667 gallons per vehicle * 500 vehicles + 1333 gallons per efficient vehicle * 500 vehicles) = 1,500,000 gallons, a reduction of 166,667 gallons per year or 10% of the total fuel use of the fleet. At $3.60 per gallon, the fleet saves (166,667 gallons * $3.60 per gallon) = $600,001 per year. If fuel jumps to $4.60 as we suppose above, the savings jump to $766,668 per year. So, if this fleet had not taken action, fuel expenses would have increased ($7,666,668 / $6,000,001) = 27.8% during the fuel price spike. But, by choosing an efficient vehicle option as in our scenario, fuel costs only spike ($6,900,000 / $6,000,001) = 14.9%... roughly half the fuel cost increase of the do-nothing scenario.
This example highlights the fact that small increases to efficiency in a business’ vehicle fleet can provide real value, especially in the face of fuel price volatility. Fuel savings go right to the bottom line and could be invested in new growth areas or services for the business to differentiate itself from competitors, such as lower prices to customers, enhanced services, better warranty, longer service hours, expanded geographic market, or further efficiency improvements. While your business is investing the fuel savings for growth, your competitors who did not act are suffering from a much higher increase in fuel costs.
By taking steps to reduce fuel consumption and hence, your company’s exposure to volatility in fuel prices, you can create strategic cost advantages against your competitors who don’t act. If oil prices spike, your company will be in a better position to take business from competitors by investing the savings in growing your business rather than sending the money to oil companies. And the advantage of reducing fuel cost is more dramatic if oil prices do spike. When calculating the value of fuel efficient vehicle purchases, executives should consider benefits derived from both cost savings and the potential economic benefits of investing the fuel savings in strategic initiatives that drive growth.