What’s the ‘Tipping Point’ for Fuel Prices?

Immediately after 9/11, the price of gasoline jumped, for the first-time ever, to more than $2 per gallon. Then, in 2004, in the aftermath of Hurricane Katrina, gas prices broke the $3 threshold. Later, in 2008, for inexplicable reasons (at least to me), the price of gas exceeded $4 – again, another first. A personal eye-opener was when it cost me more than $100 to fill up the near-empty gas tank of my vehicle. Although gasoline prices receded, they again spiked to more than $4 per gallon in 2011 and 2012. During the past decade, we’ve witnessed a steady escalation of fuel prices with forecasters extrapolating these trend lines to predict even higher future prices. What is the “tipping point” for the price of fuel before it starts to have a significant negative impact on senior management’s desire to operate a company-provided fleet?

Getting Acclimated to Higher Prices

If fuel prices stabilize at $3 per gallon, all of us would be happy. However, just eight years earlier we were shocked at paying $3 per gallon. Today, $3 sounds “cheap” because we’ve become acclimated to paying higher prices. According to a recent Gallup Poll, retail consumers said they would modify driving habits and vehicle buying patterns only when gas prices hit $5.30.

However, my contention is that corporations will tolerate even higher fuel prices without making significant modifications to their fleets, other than continuing to downsize to the minimum level needed to fulfill a fleet application. I base this contention on the fact that many multinational companies (operating substantial fleets in both the U.S. and Europe) are already paying the equivalent of $8 per gallon for gasoline and diesel for their European fleets without management resistance to operating a company-provided fleet.

My gut feeling is that fuel prices will need to reach stratospheric levels before management will consider the increased cost a “game changer” to providing company-provided vehicles. I tested this theory at the recent NAFA conference in St. Louis. I asked attending fleet managers whether a hypothetical example of $8 per gallon for fuel would change senior management’s perception as to the value of a company-provided fleet. All of the fleet managers with whom I spoke felt the doubling of fuel prices (over a period of time) would not change management perception. (“My company can’t function without full-size trucks and vans” or “It’s the cost of doing business” or “The additional cost of fuel will be added to the price of our products or offset by a fuel surcharge.”) Interestingly, there was universal agreement among surveyed fleet managers that if fuel prices hit $10 per gallon, it would be a game-changer. In such an event, all felt their companies would begin a widespread conversion to alternative-fuel vehicles. My contention is that, although there may be much hand-wringing over today’s price of fuel, prices must go much higher before there will be a significant impact on fleet composition and operations.  

I believe companies, in general, will bite the bullet and grudgingly accept these price increases as the cost of doing business. Of course, higher fuel prices will affect corporate buying decisions, along with influencing future OEM product offerings. This was proven by the past volatility of gasoline prices, which prompted many fleets to transition to four-cylinder engines. In a substantially higher fuel cost environment, fleets will maximize GPS utilization to reduce the number of miles driven. Delivery fleets, typically working in a 3-percent profit margin environment, will further fine-tune route management to ensure employees are working as efficiently as possible to minimize the increased cents-per-mile impact to the business. Corporations will raise the threshold of employee eligibility to receive a company-provided vehicle. In addition, fleets will aggressively limit personal use or substantially increase personal-use charges. Reimbursement will not be an alternative because if you are paying $8 per gallon, you, likewise, will be reimbursing at $8 per gallon.

Moving the Goal Posts

The “tipping point” as to when higher fuel prices will alter the viability of operating a company-provided fleet continues to grow higher. It seems that every time we break a psychological threshold in fuel prices, the tipping point is moved further out. Currently, the conventional wisdom is that the tipping point is above $5. I predict that if gas prices reached $5 per gallon, the conventional wisdom will ratchet the new tipping point upward to perhaps $6 per gallon, or, as is my contention, substantially higher. The only unknowns are the velocity of the price increases and growth in global demand. Worldwide, 88 million barrels of oil are consumed on a daily basis. For example, China, which currently has a country-wide fleet of 85 million vehicles, consumes 10 percent of this oil, or 8 million barrels of oil on a daily basis. Every day, more than 46,000 new vehicles are sold in China. By 2020, the vehicle population in China is forecast to increase to 200 million vehicles – an almost threefold increase. Although fuel prices ebb and flow, one thing is certain – they will trend upward.

Let me know what you think.

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