Controlling Fuel Costs as Gas Prices Rise

Fleet Financials | July 5, 2018 
Original news item appeared in: www.fleetfinancials.com

Gasoline prices are at comparatively higher levels this year than where they were last year. Should fuel prices continue to rise, controlling fuel costs is going to become a more important factor for fleets than it already is.

Seeking technologies such as telematics or alternate-fuel vehicles, along with ensuring that drivers are cognizant of how their driving habits impact fuel consumption, are key steps in lowering fuel costs, and keeping overall fleet costs at acceptable levels.

Miguel Bravo operates a small fleet in Mexico City, for one of the largest ride-hailing services in the world. At its largest, his fleet consisted of 10 cars, and at its smallest, it’s consisted of two trucks. Fuel costs have always been a major concern for him, but this year it’s been a cost that he’s had to pay more attention to, given the fact that gasoline prices in Mexico have also risen and his fleet now consists of larger, less fuel-efficient vehicles.

Aggressive driving is fairly prevalent in Mexico City, he noted, as drivers attempt to navigate the congestion that’s rampant in the city.

Despite this, it’s not a behavior that he wants his drivers to practice. It has the initial negative effect of giving the passengers a bad ride, but it also hurts fuel efficiency. To address these concerns he did two things: he placed a higher emphasis on hiring the right people (in the past his hiring qualifications weren’t as stringent) and he’s also integrated a telematics platform onto his vehicles, Azuga in his case.

Driving Conditions in Mexico City

‍‍In Mexico City, it’s rare to find a moment when the roads aren’t lined with cars. Heavy congestion is a way of life, and a three-mile route that should only take a few minutes can oftentimes take over an hour to traverse. These large spans of stop-and-go traffic mean that vehicles are constantly operating in their least efficient states.

The ride-hailing service that Bravo works for also has a presence in the U.S. There are, however, differences in how users operate the service.

In the U.S. individuals own a car, and operate as independent contractors that drive on their own schedule. They work for themselves and they receive all the money they earn in fares.

This method is viable in the U.S. because car ownership in the country is high. In 2016, U.S. Census survey estimates found that the average U.S. household had about 1.8 vehicles available to it. That number rose to over two vehicles per household in certain cities and dipped slightly below one vehicle per household in other cities.

In Mexico City, however, slightly less than half of all households have access to a car, according to a 2010 Mexico City Census estimate. This means that it’s less certain that drivers will work for themselves because they likely don’t have a vehicle of their own. This fact has opened the door for individuals that can afford to purchase and own multiple cars to reach out to drivers that would like to drive for the ride-hailing service but do not have a vehicle of their own.

This means that, more likely than not, when a person hails a ride in Mexico City, that vehicle is part of a small fleet of vehicles operating for the ride-hailing service.

Depending on the fleet operator/owner, the fleets can operate in a way that resembles a taxi fleet, or a more traditional company fleet.

According to Bravo, the majority, about 95%, of fleet owners operate their fleet of ride-hailing vehicles like a taxi fleet would operate. Fleet owners hire drivers and allow them to drive their vehicle in exchange for a minimum amount of money every week. Drivers are free to drive as much as they want to, and anything they make over that amount is theirs to keep. Maintenance, gas, and any amenities they want to offer inside the vehicle come out of the drivers’ pockets.

The other 5% — which includes Bravo — provide their drivers with an hourly wage and set hours to work. This is more akin to how a typical company fleet operates. Maintenance of the vehicle, as well as gas is the responsibility of the fleet operator.

In Mexico there are two gasoline fuel options: Magna and Premium. Magna is regular unleaded gasoline while Premium is high octane unleaded gasoline. Bravo noted that the average price he’s been paying for Magna gasoline is about 18.25 pesos per liter, which equates to about $3.42 per gallon. Last year, the price was about 16 pesos per liter, or $3 per gallon, he recalled.

This has bumped up his fuel spend; however, his telematics system has helped him control it. He estimates that he’s experienced a 5% reduction in gas usage since implementing the telematics software.

The aspects of the telematics system that have helped him the most have been the abilities to analyze the driving habits of his drivers and set a perimeters around certain areas, which alert him if drivers are driving at unauthorized times or zones.

By being able to minimize unauthorized driving, Bravo has been able to reduce fuel spend. Being notified when his drivers accelerate too fast or brake too harshly has also allowed him to talk to his drivers, correct that behavior, and reduce fuel spend.

Another method of controlling fuel costs is finding vehicles that simply use less fuel. The acquisition cost of these vehicles is often higher than their gasoline counterparts; however, their ROI could be accelerated through years of rising gasoline costs and through savings in maintenance.

Fuel costs between mid-size sedans and crossovers have gotten closer as crossovers have become more fuel-efficient.
Photo via FF Research Department.

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The average price for a hybrid vehicle stands at $26,116, based on the price of the 10 current model-year hybrid vehicles’ lowest trims. The vehicles analyzed in this instance offer the typical passenger and cargo space expected of a mid-size sedan.

The lowest fuel economy of a hybrid vehicle we looked at was 41 mpg of gasoline in the city. The highest fuel economy on the highway was 59 mpg. The combined average was 47 mpg. Hybrid vehicles are generally more efficient in city environments, so are ideal for fleets that operate in urban environments.

Plug-in hybrids provide an additional lithium-ion battery that allows the vehicle to drive in an all-electric mode for a certain number of miles, which typically ranges from 25-50 miles. Once the battery is depleted the vehicle switches to a hybrid system. If a route falls within the all-electric battery range, it is possible to operate the vehicle without using any gasoline.

The average price for these types of vehicles is higher than a hybrid vehicle. Based on three current model-year plug-in hybrids, the average price for a plug-in hybrid is $31,306. The average fuel economy of a plug-in hybrid is comparable to a typical hybrid vehicle; however, it comes with the added all-electric range.

The average price for an electric vehicle is $33,305, based on two current model-year all-electric vehicles. These vehicles run exclusively on electricity and the cost of fueling these vehicles ican be impacted by the cost of electricity in the area they are operating and charging in. Certain steps, like charging during low-demand, can help reduce the cost of fueling by an additional amount.

Fleets that choose all-electric vehicles need to consider the  range these vehicles can travel in a single charge. Charging stations are continuously being built nationwide, but availability is still not on par with gasoline stations.

The range that electric vehicles can travel in a single charge has grown to a point where range anxiety shouldn’t be too much of an issue for most driver routes. The two compact electric vehicles analyzed for this story provided about 150 miles and 230 miles on a single charge.

Looking at the mid-size gasoline-powered sedan segment, the average price for one of these vehicles is $22,893, based on 10 different current model-year vehicles. The lowest fuel economy one of these vehicles provided was 21 mpg, while the best fuel economy touted was 39 mpg. The average fuel efficiency for the mid-size  gas-powered sedans we looked at was 26 mpg city / 36 mpg highway.

However, many fleets are moving away from mid-size sedans in favor of crossovers. The average price for a compact crossover hovers around $23,757, based on 10 different current model-year crossovers. The lowest fuel economy from the crossovers analyzed was 21 mpg, the highest was 32 mpg.

The loss in fuel economy, however, comes with the added benefit of extra cargo and passenger space. The average fuel economy for a compact crossover is about 26 mpg city / 33 mpg highway.

In late June, the national average price for regular grade gasoline was $2.84 per gallon, according to AAA. Based on this average, assuming a fleet vehicle accumulates 12,000 miles driven per year, a hybrid vehicle would cost about $725 in gasoline, using the combined city and highway fuel economy mentioned above. Since a plug-in hybrid averages about the same fuel economy, the cost of fuel for a plug-in would depend on how often the vehicles’ all-electric range was optimized, but its expected to be lower.

The cost of fueling an all-electric vehicle is a little harder to determine since the cost of electricity varies by municipality. However, based on the cost of electricity in Los Angeles — 18 cents per kilowatt hour — it would cost $10.80 to fuel up a 60 kWh battery, which is what one of the all-electric vehicles analyzed for this story comes equipped with.

Based on the 238-mile range that the vehicle’s 60 kwh battery provides, it would cost roughly $545 to fuel this all-electric vehicle in Los Angeles, based on 12,000 miles in a year.

A mid-size sedan would cost $1,099 in fuel in a year based on the same 12,000 miles. A crossover would cost $1,155 based on the same parameters.

The price difference between a small crossover and a mid-size sedan is about $1,000, and the difference in fuel cost is about $60, in favor of the mid-size sedan, based on current gas prices.

The price difference between a mid-size sedan and a hybrid is about $3,000. However, hybrids offer about $400 in annual fuel savings. For plug-in hybrids, the difference in price is about $8,000, but the fuel savings should be more than $400, based on how the all-electric range is optimized.

The biggest price difference comes from comparing a mid-size sedan and an all-electric vehicle. The difference in cost is about $10,000; however, an all-electric vehicle provides about $600 in fuel savings compared to a mid-size sedan.

Federal and state incentives also have the ability to lower the difference in acquisition cost by a large margin. All-electric and plug-in hybrid cars are eligible for federal tax credits of up to $7,500. States can also provide additional incentives. Electric vehicles also provide savings in maintenance that weren’t calculated in this story.

Further Alternative Fuel Options

‍For fleets that want to use the same type of gas-powered vehicles they currently have, but want to improve their fuel efficiency,  there is also another option: upfitting their vehicles with a hybrid powertrain.

XL fleet electrification solutions offer fleet managers the ability to upfit their vehicles with a hybrid or plug-in hybrid system. The hybrid system, which is available for a number of Class 2-6 vehicles, provides an average 25% MPG improvement, representing an approximate 20% fuel use reduction, according to the company.

The company’s plug-in hybrid system, which is currently only available on the Ford F-150, provides an average 50% MPG improvement and a 33% reduction in fuel use thanks to a 15 kWh lithium-ion battery that assists the vehicle while accelerating during its most inefficient drive times, such as when the vehicle moves from a stop up until 35 mph.

“Our system compared to an all-electric vehicle is substantially less expensive to purchase and operate, with no additional charging infrastructure, driver training or OEM warranty implications,” said Eric Foellmer, XL’s director of marketing. “We’re seeing an ROI for our hybrid solutions in as little as one to three years. Over time, you’re saving at the pump, improving driver productivity and reducing brake wear with our regenerative braking system.  And as the cost of fuel continues to go up, our ROI is realized sooner.”

Brent Crude Oil Price Forecast

‍Brent crude oil prices are forecast to rise to $71 per barrel in 2018, and in 2019, the average price per barrel of Brent crude oil is expected to decline slightly, to $68 per barrel, according to the U.S. Energy Information Administration (EIA).

There will also be tight global oil market balances due to lowered expected production growth from OPEC and the U.S., according to the EIA.

In May 2018, Brent crude oil prices averaged $77 per barrel, which was up $5 per barrel compared to April 2018. This price was the highest monthly averages since November 2014.

West Texas Intermediate (WTI) crude oil prices are expected to average $7 per barrel lower than Brent prices in 2018 and $6 per barrel lower than Brent prices in 2019, according to the EIA.

Looking at production, oil production is expected to decline by roughly 400,000 barrels a day in 2018 when compared to the same time last year, averaging 32 million barrels a day. By 2019, production is expected to climb to 32.1 million barrels a day, according to the EIA.

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