Oil Prices: Less Pain at the Pump
Do commercial fleets really benefit from falling oil prices?
Since last summer, oil prices have been steadily declining. Just as this issue of FleetDigest went to press, crude was hovering at round $48 U.S. a barrel. To give you an idea of just how dramatic the price drop has been, in July 2014 the price for that same barrel of oil was over $100.
Analysts point to a number of factors causing the decline, such as shrinking demand for oil worldwide (much of Europe continues to witness sluggish economic growth, while China is also witnessing slowdowns).
Additionally, despite the ongoing conflict in Syria and Iraq, little impact is being felt on the oil production front. OPEC—notably Saudi Arabia—hasn’t cut back output (analysts say this is part of a move to reduce competition from oil producers in North America who pay significantly more to extract black gold from the Athabasca oil sands and shale deposits). The result is that pump prices (certainly in Canada and the U.S.) have been declining to levels not seen in nearly a decade.
On the surface, this would appear beneficial to motorists, who now have more money in their pockets. But how are these lower fuel prices impacting commercial vehicle fleet buyers that are traditionally even more sensitive to price fluctuations?
Dennis DesRosiers, President of DesRosiers Automotive Consultants says that as far as Canada and the auto industry is concerned, higher oil prices tend to hurt demand, while lower prices tend to improve it. Yet he also notes that in many respects, it’s very difficult to paint an actual correlation between vehicle demand and fuel prices because there are so many variables involved.
A $13 billion stimulus
Nevertheless it does appear that significantly lower fuel prices have an effect of creating a stimulus, at least as far as the average consumer is concerned. “Our data shows that the average car or light truck in Canada consumes approximately 1,820 litres annually,” says DesRosiers. “A drop in fuel prices by 30 cents per litre has the effect of creating a $13 billion stimulus package and that’s a lot to be pumping into our national economy.”
On the fleet side of automotive sales, DesRosiers says that in times of falling oil prices (or even rising ones for that matter), it’s important to look at the impact on Alberta, the centre of Canada’s energy production. DesRosiers says that data points to the fact that despite dips in fuel prices during 1998-99 and then 2008-09, overall vehicle usage in Alberta has doubled over the last 20 years. He also notes that due to the nature of the province’s energy intensive economy, a lot of fleet business is directly tied into oil and related extraction and production.
Since price is a prime factor in many fleet vehicle purchases, businesses are often more sensitive to swings in fuel demand. If fuel prices decrease, they are more likely to purchase larger trucks and vans. If they go up, they’re more likely to purchase smaller vehicles and fewer of them.
Furthermore, fleet vehicles often represent one of the biggest capital expenditures for many businesses and municipalities, not just in purchase costs, but also maintenance and fuel. If gasoline prices are higher, businesses will have to pass on those costs to their end customers, cull the number of vehicles in circulation and/or cut back operations.
On the flip side, lower fuel prices tend to enable greater distances to be travelled, provide opportunity for having more vehicles in circulation and expand the number and types of services business can offer via fleet usage. Yet lower prices can also be a bit of a double-edged sword since more miles travelled and more vehicles on the road mean more costs need to be allocated for servicing and repairs.
For automakers that rely heavily on fleet sales—DesRosiers says that Ford, General Motors and Chrysler Canada account for approximately 90 percent of fleet business in this country—the impact of fluctuating fuel prices tends to be felt hardest.
What is interesting however, is that in recent years, Canada as a whole—despite relatively sluggish economic growth—has experienced record demand for new cars and trucks with 2012, 2013 and 2014 proving to be banner years for the auto industry in terms of sales.
Carlos Gomes, Senior Economist with Scotiabank, notes that while overall demand for new vehicles has reached record levels in the last few years, fleet demand has remained low by comparison, as businesses and municipalities seek to maximize return on investment. This partly explains why the average vehicle age in Canada has now reached more than 11 years.
He notes that as far as Alberta is concerned, substantial investment in the oil sands over the last decade, and a more diversified economy, are likely to cushion any negative economic impact resulting from changing oil prices – more than they would have in the past. So while a drop in demand for new cars and trucks in the province is expected, it isn’t likely to be a significant one.
Looking at the bigger picture, Gomes notes that fleet sales are predicted to ramp upward in Canada. “Things have actually begun to improve on the fleet side,” he says. “Economic growth has been fairly decent, especially in Ontario and Quebec. These provinces in particular have continued to benefit from recent economic strength in the U.S. and for small business owners this is definitely a good thing.”
Watch the U.S.
Gomes says that business purchases in Canada tend to closely follow those in the U.S., and a recent surge in fleet vehicle sales south of the border is likely to translate to an increase in sales here in Canada as well.
He notes that Ford’s introduction of the aluminum-bodied F-150 pickup is expected to have significant impact on the fleet market and will likely help fuel an increase in pickup demand, especially as Ford is pitching improved versatility and fuel economy – an aspect that, even in times of lower gas prices, is still one of the most important considerations for fleet buyers.
Longer term, the impact of lower fuel and oil prices on fleet and vehicle sales is less clear. Many economists and oil industry observers are predicting a sustained period of relatively low oil prices, at least through the next 2-3 years.
If that proves to be the case, much like individual consumers, lower prices at the pump will continue to put more money in the pockets of commercial vehicle operators, providing more opportunities to invest in their business and make purchases. Therefore, it would seem, for the foreseeable future at least, the overall impact of lower fuel prices in Canada would appear to be a positive one for fleets.