Controlling Fleet Fuel Expenses
Presented by Rita Lovejoy
Manager, Client Relations
Wright Express Corporation
October 22, 2008
New EnglandNAFA Chapter
Fleet Educational Seminar
©2008 Wright Express Corporation. All Rights Reserved.
Controlling Fleet Fuel Expenses
I’ve been asked to… provide some insight into what drives fuel prices at the pump.
And, offer suggestions on how to manage & control fleet fueling costs.
In doing so, I hope to…
• Add some insight on the fuel industry
• Provide some value to you
• Refrain from any endorsement or promotion of Wright Express
©2008 Wright Express Corporation. All Rights Reserved.
WEX® National Fuel Price AnalysisAverage PPG Unleaded
WEX® National Fuel Price AnalysisAverage PPG Unleaded
$0.90
$1.40
$1.90
$2.40
$2.90
$3.40
$3.90
$4.40
2004 2005 2006 2007 2008
2004 1.585 1.66 1.747 1.803 1.985 1.981 1.912 1.87 1.868 2.004 1.975 1.849
2005 1.828 1.90 2.053 2.234 2.149 2.149 2.282 2.507 2.883 2.733 2.259 2.169
2006 2.318 2.277 2.413 2.736 2.891 2.863 2.967 2.94 2.536 2.221 2.209 2.303
2007 2.222 2.249 2.542 2.829 3.082 3.018 2.938 2.756 2.773 2.789 3.059 3.00
2008 3.032 3.026 3.241 3.436 3.756 4.03 4.034 3.738 3.679
JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
©2008 Wright Express Corporation. All Rights Reserved.
WEX® National Fuel Price AnalysisAverage PPG Diesel
WEX® National Fuel Price AnalysisAverage PPG Diesel
$0.90
$1.90
$2.90
$3.90
$4.90
$5.90
2004 2005 2006 2007 2008
2004 1.607 1.644 1.685 1.738 1.795 1.771 1.781 1.863 1.941 2.165 2.181 2.077
2005 2.028 2.069 2.241 2.339 2.266 2.327 2.418 2.567 2.871 3.144 2.73 2.529
2006 2.547 2.549 2.617 2.812 2.942 2.941 2.984 3.085 2.843 2.594 2.604 2.673
2007 2.562 2.555 2.713 2.892 2.876 2.875 2.92 2.909 2.993 3.109 3.409 3.393
2008 3.379 3.442 3.913 4.111 4.435 4.676 4.72 4.361 4.098
JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
©2008 Wright Express Corporation. All Rights Reserved.
Cost of Fuel in EuropeU.S. $$/Gallon – week of 9/22/08
FRANCE$7.81
U.K.$7.86
BELGIUM$7.99 GERMANY
$7.98
ITALY$7.89
NETHERLANDS
$9.07
U.S.$3.96
©2008 Wright Express Corporation. All Rights Reserved.
What Causes the High Price of Gas?
Refining Capacity: “the biggest reason for an increase in prices has to do with refining capacity…gasoline supplies are low due to an inability to refine oil into gasoline”
Environmentalists: “Since the 1970’s, liberal politicians in Congress have passed laws that have locked up most of our oil reserves, stopped the construction of refineries and virtually banned the building of nuclear power plants. Every time we [buy] fuel, we pay the price for these foolish policy decisions”
Government: “…ethanol mandates as well as bad tax and regulatory practices are to blame for the exorbitant fuel prices hammering American families”
Wall Street: “The plunging value of the dollar, the U.S. housing crisis and widespread problems in the banking sector have led investors away from traditional investments and toward commodities [including oil]…as money pours in…the markets expand and prices rise”
Big Oil: “ [In July, 2008] CNN/Opinion Research poll found that 68% of respondents think U.S. oil companies are a major cause behind high gas prices. The results came on the same day that ExxonMobil, the world’s biggest publicly traded oil firm, reported the largest quarterly profit in U.S. history”
OPEC: “OPEC controls over 40% of the world’s oil production and approximately 65% of the planet’s oil reserves. As the market leader, OPEC is free to essentially set its own price for crude oil. As a result, there is no significant competition to drive gas prices down
©2008 Wright Express Corporation. All Rights Reserved.
What We Pay for Fuel
Source – EIA Gasoline & Diesel Fuel Update tonto.eia.doe.gov/oog/info/gdu/gasdiesel.asp
©2008 Wright Express Corporation. All Rights Reserved.
Supply & Demand
DEMANDTop 10 Consumers:
60% of the World’s Consumption
Country BPD %United States 20.7 25.2%China 6.5 7.9%Japan 5.6 6.8%Germany 2.6 3.2%Russia 2.5 3.0%India 2.4 3.0%Canada 2.3 2.8%South Korea 2.1 2.6%Brazil 1.9 2.4%France 1.9 2.4%
SUPPLYTop 10 Producers:
65% of the World’s Production
Country BPD %Saudi Arabia 10.7 13.4%Russia 9.7 12.1%United States 8.3 10.4%Iran 4.1 5.1%China 3.8 4.8%Mexico 3.7 4.6%Canada 3.3 4.1%United Arab Emirates 3.0 3.8%Venezuela 2.8 3.5%Norway 2.8 3.5%
©2008 Wright Express Corporation. All Rights Reserved.
OPEC Plays a Major Role in What You Pay
OPEC & Member Compliance
• OPEC controls 40% of worldwide production & 75% of estimated reserves
• OPEC members supply 26% of US needs
• OPEC’s policy is to keep crude prices at profitable levels for its membership
Algeria
Indonesia
Iran
Iraq
Kuwait
Libya
Nigeria
Qatar
Saudi Arabia
United Arab Emirates
Venezuela
©2008 Wright Express Corporation. All Rights Reserved.
World Wide Consumption Drives PPG
U.S. Competes for Oil Globally But Only Produces 40% of its Oil Needs
The Future: 1.2 trillion barrels in proven oil reserves
• OPEC: 895 billion barrels = 75% (Saudi Arabia = 262 bb/22%)
• United States: 21 billion barrels = <2%
OPEC Members
U.S. Production40%
Other
Canada
©2008 Wright Express Corporation. All Rights Reserved.
Major World Events Affects Price Per Gallon
History Has Been Shaped by Concerns over Oil…
1970 Arab Oil Embargo Increase Iranian Revolution Increase
1980 Eroding OPEC Share DecreaseSaudi Expansion Decrease
1990 Iraqi Invasion IncreaseGrowth Asian Demand IncreaseAsian Collapse, Weather DecreaseOPEC Restraint Increase
Decade Event/Trigger Price Impact
©2008 Wright Express Corporation. All Rights Reserved.
Major World Events Continue to Affect Price Per Gallon
History Has Been Shaped by Concerns over Oil…
Year Event/Trigger Price Impact
2001 9/11 & Recession Decrease
2002 China’s demand for oil Increase
2004 War & insurgency in Iraq Increase
2005 Hurricanes severely limit Increase US refining capacity
2007 World-wide demand Increase
©2008 Wright Express Corporation. All Rights Reserved.
From Port to Pump
©2008 Wright Express Corporation. All Rights Reserved.
Distribution
©2008 Wright Express Corporation. All Rights Reserved.
Distribution…and Price
©2008 Wright Express Corporation. All Rights Reserved.
What You Pay at the Pump is Affected by...
Futures Market & Rack Replacement Costs
• Crude oil is a commodity
• Future crude oil pricing set by New York Mercantile Exchange (NYMEX)
• Wholesale pricing to distributors set at terminals
• Rack replacement costs drive retailer pricing
• Higher replacement costs create spikes in retail PPG
• Typically dealer margin can not keep pace
• Additives added at terminals by brands increase PPG
©2008 Wright Express Corporation. All Rights Reserved.
Future crude oil pricing set by NYMEX
‘Stupidity’ Behind Oil Price Surge, Traders Say9/24/08: New York (Bloomberg) – A massive jump in the price of oil this week has raised new concerns about the role of speculators and possible market manipulation, but traders say the historic surge had more to do with “stupidity” or poor risk management.
Oil took a wild ride Monday, surging more than $25 (U.S.) a barrel in the last minutes of trading on the New York Mercantile Exchange. The price for the October contract, which expired Monday, soared as high as $130, before settling at $120.92, up $16.37. That was the largest one-day gain ever.
…Monday’s action prompted an investigation by regulators…It also sparked a new round of complaints from politicians who blame speculators for driving up the price of oil and gasoline.
“We’ve had hearing after hearing on this,” North Dakota Senator Byron Dorgan told industry officials during a congressional committee hearing on gas prices yesterday. “We’ve had all the experts come, who have an interest in saying there is no speculation, tell us ‘there is nothing going on, don’t believe your eyes.’ “
©2008 Wright Express Corporation. All Rights Reserved.
What You Pay at the Pump is Affected by...
Limited Refining Capacity In The United States
• Last new refinery built in 1976
• Expansion of existing facilities only
• Sky rocketing construction costs confront industry
• Environmental issues impede new development
• Engineering expertise has shifted overseas
• Construction outside USA to meet expanding world demand
• Industry at odds with government regulators45% of U.S. Refining Capacity
is located in Texas & Louisiana
©2008 Wright Express Corporation. All Rights Reserved.
What You Pay at the Pump is Affected by ...
Federal & State Legislation
Clean Air Initiatives – Reformulated Gasoline – MTBE
Boutique fuels
Blended fuels – ethanol & alcohol
Federal & State Excise Taxes
• Average more than $ 0.40 per gallon
• Second only to cost of crude oil
©2008 Wright Express Corporation. All Rights Reserved.
What You Pay at the Pump is Affected by ...
Season & Weather Play a Role
•Summer driving puts pressure on unleaded gas demand
•Winter heating oil demand puts pressure on priceof diesel
©2008 Wright Express Corporation. All Rights Reserved.
What You Pay at the Pump is Affected by ...
Oil Infrastructure Disruptions Play a Role
• Devastation of hurricanes
• Unplanned refinery downtime
• Even scheduled refinery downtime
• Refineries operating at near capacity
©2008 Wright Express Corporation. All Rights Reserved.
Devastation of Hurricanes
Ike Pushes Gasoline Prices Back Toward $4HOUSTON (AP) – From Florida to Tennessee, and all the way to Connecticut, people far from Hurricane Ike’s destruction felt one of its tell-tale aftershocks: gasoline prices that surged overnight – to nearly $5 a gallon in some places
Fear of supply shortages, and actual fuel production disruptions, resulting from Ike’s lashing of vital energy infrastructure led to pump price disparities of as much as $1 a gallon in some states, and even on some blocks
Late Saturday the U.S. Minerals Management Services said there were two confirmed reports of drilling rigs adrift in the central Gulf of Mexico
Some 15 Texas oil refineries…were shut as a precaution ahead of the storm, while another in Louisiana remained shut in the wake of Hurricane Gustav two weeks ago. Together, the refineries make up just under a quarter of U.S. fuel production capacity
Ike also shut down crude oil production in the Gulf of Mexico, a quarter of U.S. output, along with the bulk of shipping, port and pipeline operations on shore, hindering the transport of fuel to other parts of the country
©2008 Wright Express Corporation. All Rights Reserved.
What You Pay at the Pump is Affected by ....
Retail Fuel Sales, Branding and Competition…Locally
• 185,000 retail fuel sites in the United States
• Major oils are concentrating up-stream
• 72% of stations are owned & operated by independent dealers & distributors
• Average margin for the retailer is $0.13 per gallon
• Tier II & III convenience stores can sell fuel at $0.06 margin to attract customers
• Hypermarkets / Supermarkets sell fuel at $0.04 margin to attract customers
Distributors moving to large Convenience Stores with high # of fuel islands Major Oils selling off company-owned stores
©2008 Wright Express Corporation. All Rights Reserved.
Retail Fuel Station Profiles
Traditional Corner Fuel Station:
• Limited in-store space – 2 bay garage
• Monthly volume – 50,000 gallons
• 4-8 Fuel pumps
• Profitability dependent on fuel pump sales
Emerging Convenience Store Fuel Station: • Large in-store space – Earn 33 cents / dollar
• Monthly fuel volume – 500,000 gallons
• 16-24 Fuel pumps
• Profitability dependent on in-store sales
• Customer fueling drives in-store traffic
©2008 Wright Express Corporation. All Rights Reserved.
A Word About Credit Cards
Retail Fuel Merchant Side:
• Average gross margin 13 cents per gallon (cpg)
• Average credit card fee – 9 cpg @ $ 4.00/gal
• Net margin before store expenses 4 cpg
• Store expenses vary 4.5 cpg – 13.5 cpg
• Profitability driven by in-store salesCredit Card Issuer Side:
• Funding costs increasing
• Bad debt increasing
• Margins per transaction shrinking
• Severe pressure on earnings
©2008 Wright Express Corporation. All Rights Reserved.
Tier I Fuel Stations
• Major Oil branded sites: Six Sisters
• Approximately 91,576 stations nationwide
• Typically priced 2 – 6 cpg higher
Tier 1 vs. Tier II/III
Tier II/III Fuel Stations
• For example: Sunoco, Speedway, Circle K, and unbranded sites
• Approximately 73,424 stations nationwide
• Typically priced 2 – 6 cpg lower
ExxonMobilShellBP
ChevronConoco Phillips
Total SA
©2008 Wright Express Corporation. All Rights Reserved.
High…and Volatile!How Out of Control is It?
Automotive FleetApril, 2008: “How Fleets Tackle Rising Fuel Costs”
“15 Ways to Save Fuel”
May, 2008:
“Many fuel market analysts are forecasting that the national average could reach as high as $3.75 per gallon…50 cents per gallon higher than the record price set May, 2007”
September, 2008: “60 Ways to Reduce Your Fuel Spend”
#42: Get a Fleet Fuel Card!
©2008 Wright Express Corporation. All Rights Reserved.
Fuel — Business Fleet’s #1Variable Expense
A single light duty truck will…
• Fill-up 96 times a year
• Consume 1,600 gallons of fuel annually
• Cost the Business $6,000 to fuel (@ $3.75 average PPG)
Rolled-up for a 1,000 vehicle fleet, that equates to…
• 96,000 annual fuel transactions
• 1,600,000 annual gallons of fuel
• $6,000,000 of expense
A 20% swing in PPG can impact your bottom line by $1,200,000, +/-
500 vehicles = $600,000 100 vehicles = $300,000
1 vehicle = $1,200
©2008 Wright Express Corporation. All Rights Reserved.
Hidden Costs Lurk InDaily Fuel Transactions
If 20% are for premium fuel…$64,000 wasted
If 5% go into non-company vehicles…
$300,000 pilfered
If 50% are at higher priced fuel sites…
$32,000 lost
©2008 Wright Express Corporation. All Rights Reserved.
Go Green!
Fleet Initiatives: Focus on
Cost Reduction
Green Initiatives:Focus on Reducing
Carbon Footprint
Green Fleet
©2008 Wright Express Corporation. All Rights Reserved.
Corporate Green Strategies*
•Right sizing the fleet is underway
•Moving from pickups to sedans, expect 10 – 15% increase
•Replacing 150’s with hybrids
•Looking at buying more fuel efficient vehicles
•Reducing travel to meetings, more conference calls
•Restructuring routes and possibly outsourcing some routes
* Wright Express Lead User Group meeting, 9/18/08
©2008 Wright Express Corporation. All Rights Reserved.
Telematics
Remote Vehicle Diagnostics
Automatic Vehicle Location (AVL) services
Wireless Network
Data Center
Satellite
Telematics Enabled Unit
Fleet Manager
InformationManagement
System
Third Party FleetManagement SW
©2008 Wright Express Corporation. All Rights Reserved.
2008 Aberdeen Group Study
“The implementation of a GPS system provides an average 13.2% reduction in fuel costs…through increased efficiency and driver accountability”
The Aberdeen Group
©2008 Wright Express Corporation. All Rights Reserved.
Price Risk Management… or Budget Management
Price Risk Management — an insurance policy, not speculation
•Futures market allows for forward views of expected prices at specified points in time
•The New York Mercantile Exchange is the primary market for oil futures
•Futures, options & swaps are the tools used for hedging
Hedging allows a fleet to set a budgeted fuel price for the year
•Eliminates price volatility from month to month expense
•Reduces pressure on fleet manager to control an uncontrollable expense
©2008 Wright Express Corporation. All Rights Reserved.
Option
• Provides the customer with the option to purchase fuel at a certain fixed daily price for a fixed volume.
• Client would exercise the option for all fuel purchases above the fixed daily price
• All purchases below the daily price will be at prevailing pump price.
Collar
• Offers the customer the price of fuel within a fixed range, such that when pump prices increase above the range, the customer will only pay the maximum collar price.
• As pump prices decrease, and fall below the range, the customer will pay the minimum collar price.
Fixed Retail
• Similar to a forward purchase contract, the customer may purchase fuel at a fixed price for a period of time at the daily average price for a Designated Market Area (DMA)
Wholesale + Fixed CPG
• Lock in a floating price for fuel based on the wholesale price of fuel and pay a fixed cents per gallon retail mark-up for that rate.
client risk
protectionoption
Hedging Alternatives Hedging Alternatives
©2008 Wright Express Corporation. All Rights Reserved.
Reducing Fuel Costs: The Basics
Avoid aggressive driving
Observe the speed limit
Reduce idling
Take the junk out of your trunk
Keep your tires inflated
Turn off the air conditioning
Roll up your windows
“Smart Ways to Save on Gas”PARADE Magazine; July 6, 2008
©2008 Wright Express Corporation. All Rights Reserved.
Reducing Your Fuel BudgetBest Practices*
Target your vehicles:•Change the vehicle size
• Increase number of compact sedans and wagons
•Replace older gas consuming vehicles on a more regular basis.
•Cut unnecessary vehicles
•Review the uses of vehicles to see if it’s possible to cut some vehicles and combine trips.
•Focus on out-of-route miles
•Monitor the miles per gallon more closely
Wright Express Lead User Group Survey – Sept-08
©2008 Wright Express Corporation. All Rights Reserved.
Reducing Your Fuel BudgetBest Practices*
Drive Fueling to Lowest Cost Providers: •Determine the high spend locations and target
them
•Find the lowest price stations and direct Drivers to lowest price locations
•Make drivers go to lowest cost fueling vendors without incurring additional diversion cost
•Get information out quicker on best locations
•Communicate to Supervisors instances where Drivers are not complying with policy
Wright Express Lead User Group Survey – Sept-08
©2008 Wright Express Corporation. All Rights Reserved.
Reducing Your Fuel BudgetBest Practices*
Reporting
• Use all the tools available to “red flag” areas, then research questionable purchases.
• Monitor exceptions and intervene in a timely manner.
• Monitor fuel purchases by fuel type:
o Non-fuel purchases
o Diesel purchases by gasoline vehicles
o Gasoline purchases by diesel vehicles
Analysis and Audits
• Look for patterns in the data; know what’s normal and what isn't.
• Analyze fuel spend daily to look for outliers.
• Monitor your mpg compared to benchmarks based on business use
• Monitor gallons pumped vs. tank capacity
• Audit all non-fuel purchases
Wright Express Lead User Group Survey – Sept-08
©2008 Wright Express Corporation. All Rights Reserved.
Fleet Fueling Policy
Find the lowest price
Make the policy very clear
Enforce the policy
Allow no exceptions
Document fuel reductions
Motivate your people to comply
Communicate early and often
Remember: Information is the Key
©2008 Wright Express Corporation. All Rights Reserved.
References
www.api.org
www.eia.doe.gov
www.automotive-fleet.com