Controlling Fleet Fuel Expenses Presented by Rita Lovejoy Manager, Client Relations Wright Express...

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


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


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


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


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


What We Pay for Fuel

Source – EIA Gasoline & Diesel Fuel Update tonto.eia.doe.gov/oog/info/gdu/gasdiesel.asp


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%


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


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


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


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


From Port to Pump


Distribution


Distribution…and Price


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


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.’ “


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


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



Season & Weather Play a Role

•Summer driving puts pressure on unleaded gas demand

•Winter heating oil demand puts pressure on priceof diesel



Oil Infrastructure Disruptions Play a Role

• Devastation of hurricanes

• Unplanned refinery downtime

• Even scheduled refinery downtime

• Refineries operating at near capacity


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


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


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


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


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


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!


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


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


Go Green!

Fleet Initiatives: Focus on

Cost Reduction

Green Initiatives:Focus on Reducing

Carbon Footprint

Green Fleet


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


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 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


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


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


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


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



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




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



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


References

www.api.org

www.eia.doe.gov

www.automotive-fleet.com

http://www.api.org/

http://www.eia.doe.gov/

http://www.automotive-fleet.com/

Thank You…

For a copy of this presentation,

email me at:

[email protected]

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Controlling Fleet Fuel Expenses Presented by Rita Lovejoy Manager, Client Relations Wright Express...

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