A sharp increase in the price of fuel captures both the corporate sector and private community’s attention and directly impacts South Africa’s economy. More to the point, our corporate sector clients are struggling to manage rising operational expenditure and it has become a virtual nightmare to try and budget/ estimate the single biggest expense in fleet.
In completing more than 50 detailed fleet reviews, our Eqstra Fleet Consulting team was able to prove that fuel now contributes between 38% & 44% of overall corporate fleet cost, dependent on the fleet mix.
In light of this fact it is alarming to note that within 15 years the price of fuel has increased by more than 560%. This increase is equal to an average increase of 13% year on year. Considering the average CPI over the same period was 5.25%, effectively fuel increases have surpassed the CPI index by staggering 247%.
There does appear to be a slight “slowdown” during the last five years, with fuel increasing on average 12% YoY since 2009, but as the graph below indicates, increases on petrol still remain higher than the 15 year trend-line.
At reef, 95 and 93 petrol grades now cost R14.32 and R14.11 per litre, respectively, and the wholesale price of diesel (0.05%) is R13.39 on the reef. The Ministry of finance further announced a 12c/ litre fuel and 8c/litre diesel levy increase effective on the 2nd April which will push petrol closer to the R14.50/litre mark.
And whilst the 12-13% increase appears to be a statistical indication in terms of estimating by what % we can reasonably budget for increases it remains virtually impossible to predict pricing. The key factors that will impact our pricing in the following year are:
With the above in mind energy price forecasts remain highly uncertain, and the current values of futures and options contracts suggest that prices could differ significantly from the forecast levels (Market Prices and Uncertainty Report). WTI futures contracts for June 2014 delivery, traded during the five-day period ending March 6, 2014, averaged $101/bbl. Implied volatility averaged 18%,establishing the lower and upper limits for the market's expectations of monthly average WTI prices in June 2014 at $87/bbl and $118/bbl, respectively compared to a high in 2013 of $111/bbl.
The volatility of oil pricing is further proven when we analyse the yearly lows and highs in actual SA fuel pricing for the past four years. Whilst the trend appears to be fairly consistent it contradicts the 13% increase, with an average difference of 15.93% between the lowest price and highest price per annum during the last 5 years.
To place this in context, the average fleet vehicle consumes approximately 5,000 litres per annum. At the start of 2013 this would equate to an annual cost of R59,300 - however at the end of December the same calculation results in an annual cost of R67, 750 which is a 14.1% increase in real financial terms.
It is therefore important that we try and understand the key factors that influence the fuel price in an effort to pro-actively predict future increases/ decreases.
Brent Crude oil is refined to produce petrol and diesel and the cost of crude oil is traditionally the single greatest factor affecting fuel prices over time, it is therefore fundamental to understand factors that drive the supply of crude oil. According to the US Energy Information Administration (EIA) (2010) the supply of crude oil is influenced by:
The two factors that underpin the demand for petrol are the number of consumers and the rate of consumption. The number of consumers is a function of the number of vehicles and the number of drivers, (Pekol: 2010). Both these increase with population and can be affected by:
In summary, for a given number of motor vehicles’ consumers, the rate of petrol consumption depends on:
Over and above supply and demand side factors, fuel prices are also influenced by:
Figure 4 indicates that since the beginning of 2007, petrol tax index has been constantly trending upward with only one major tax relief which took place in February/March 2010. The increase in petrol tax rate is a domestic factor that also has a serious effect on petrol prices. It is therefore important to account for changes in fuel tax in your annual fuel budget.
We cannot predict with certainty what will happen in the future with prices of crude oil and petroleum. We can only speculate using statistics.
According to Shell SA figures, petrol and diesel were expected to increase by 46 – 48 c/l and 52.18 – 54 c/l respectively during the first two quarters of 2014. Based on these figures, ceteris paribus, we anticipate fuel price to be even closer to R15.00 per litre by the middle 2014 and likely to exceed R15.50 per litre if the current trend continues. This raises the need for fleet operating companies to be stringent in managing driver behaviour and budgeting for fuel cost as well as the choice of vehicle fleet mix.
With the above in mind, and considering the South African trend we would recommend that at least 15% annual inflation is budgeted for fuel when preparing you vehicle travel budget. We would also recommend that you review your fleet mix and operational costs at least every two years to ensure the optimal fleet is being run. To this effect our next white paper will focus on the optimal replacement cycle taking all cost factors into consideration.
Eqstra Fleet Management has various solutions that can assist you in understanding and managing fuel costs more effectively. In particular our GPS solution has been instrumental in delivering savings in excess of 7% to clients by making sure driver behaviour is effectively managed.
Our Eqstra Fleet Consulting team has also been able to deliver more than R62m in savings initiatives during the last 18 months by simply reviewing the clients historic data, and working with the client to develop a more efficient mix and management structure.
We would urge you to contact us through either your account manager of by making direct contact with our Fleet Consulting team if you require any assistance in this regard.
All rights reserved. The information contained in this document is confidential and has been prepared by EQSTRA FLEET CONSULTING solely for information purposes to our strategic clients; it is not to be relied upon by any third party without our prior written consent.
This report, whilst based on the most realistic information and proven statistical methodologies available to us at publication and is intended to provide general information. It is not an exhaustive treatment of the subjects raised. Accordingly, it should not be relied on to address specific situations or circumstances and is not a substitute for accounting, tax, legal, or other professional advice.
Before making any decision or taking or refraining from any action which might affect your finances or business affairs, or those of your employees, you should consult a qualified professional adviser to validate.
Hein du Plessis
Head of Fleet Consulting
Email address: email@example.com