Global Oil: Fill ‘er Up!

oilfillerLower fuel prices have a significant impact on consumer demand as well as residual values.

Next to weather conditions, fuel prices seem to be the most popular topic for Canadians. It’s always on our minds, at least for those who are faced with paying for the stuff, and that is most of us.

Generally speaking, we are irrational when it comes to fuel prices and their impact on our life. That opinion was formed when I worked in gas stations back in my high school and college days. People would drive across town for fuel that is $.02 cheaper than the station closer to them. Do the math, and you realize that on a 60 litre fill they saved a mere $1.20.

Canadian economics

From the early days, before Canada was Canada, our economy has always been resources driven: from furs, forests, ferrous metals to fuel. The hollowing out of our manufacturing sector has put even more importance on the pumping of black gold as a driver of our GDP and of our personal wealth.

Lately, to the relief of those at the pumps, crude has been on the way down, and pump prices are reflecting that. The accompanying chart highlights the fact that there has been a growing spread between what refiners pay and what drivers pay. It’s noteworthy that crude prices have fallen 44% from June to December, 2014 but pump prices have only fallen 25.3%

Those of us in the car business are very aware of the impact crude and fuel prices play in our daily lives. When pump prices go up, and we have a lot full of Suburbans, Sequoias, and Expeditions, the days needed to turn the inventory goes up. In addition, it’s more expensive to buy the Civics, Cruzes, and Fortes we need to sell to suddenly fuel-conscious buyers.

Moreover, when times are good, and people are flying from every part of the country to work in the tar sands, when they get back home, they buy new toys – cars and truck chief among them. When prices dip, those extravagances are the first to go. So the car business is exposed to the shrinking fortunes of those not making the money they once did. Just as this column is being written, there are reports of Calgary seeing a dramatic shift in real estate for January 2015 – a canary in the coal mine?

Future forecasts

So what can we expect for used car prices if oil stays below the $50 per barrel range? Well, we can certainly expect to see continued interest in SUVs of all sizes, and in pick-ups. In the first half of 2014 when we saw record high pump prices, the Canadian vehicle market continued its shift to a truck bias. In June 2014, when we saw fuel peak, all trucks combined accounted for nearly 58% of the market – up almost 3% over the same time in 2013 when gas prices were lower. There will be a ceiling to the number of drivers who want a truck or SUV, and that will serve as a limiter. But prices may begin to rise if demand continues to grow.

At the other end of the spectrum, hybrids, plug-ins, and EVs are likely going to witness declines because of reduced interest. To a lesser extent, sub-compacts are likely to share the same fate. There is a portion of the public that will likely always shop that segment, but those who kicked the tires because they wanted an efficient car, are probably buying something larger.

The Canadian dollar

Another key point when considering the impact of oil prices on the car market, is the impact on the Canadian dollar. Since we have hinged so much of our economy on the tar sands, the dollar tends to mimic the movement of oil prices. At the time of writing, it was back-and-forth over the $.80 mark. If oil drops more, we can expect the dollar to follow.

Car dealers – the wise souls that they are – always know where to get a deal. That’s why we are seeing US dealers back at Canadian auction buying in volume again. And where there is more competition, we can usually expect higher prices. We already had a supply situation that was struggling to meet demand for the Canadian market. Now we are helping to fill the US supply pipeline too. Best advice for a dealer – if you have access to a closed auction, use it to your advantage because there won’t be US buyers getting a 20% discount.

There are a lot of factors that come into play when the market decides what a car is worth. We have just brushed on a couple, albeit key ones here. The volatility of the price of oil, along with foreign exchange, are well beyond our control. The best advice: stay informed, be nimble, and take smart losses.

Global Oil

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