Reduce Fuel Cost Volatility By Purchasing More Efficient Vehicles

High fuel prices sap economic growth, eat into profit margins and reduce discretionary budgets. The only thing worse for businesses than steadily increasing costs is uncertainty about future costs. However, today’s fuel prices have created conditions in which hybrid electric vehicles are cost-effective, sound business investments, and businesses that take action to increase the efficiency of their transportation fleets are directly reducing their fuel cost uncertainty.

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Best way to reduce fuel volatility is to increase vehicle efficiency

The single most cost-effective way to reduce volatility in fuel costs is to use less fuel. Let’s run through a scenario to quantify what happens when fuel costs rise, using a single commercial vehicle as an example. If the vehicle fuel economy average of a hypothetical delivery van driving a suburban route is 12 mpg and the vehicle averages 20,000 miles per year, this vehicle uses 1,667 gallons of fuel per year. If we assume the price of fuel is $3.80 per gallon, the company pays $6,335 per year. If fuel prices rise to $4.56 per gallon (as they have recently in California), annual fuel costs for this vehicle rise 20 percent to $7,602.

Now, let’s suppose that the company that owns this van replaces it with a hybrid commercial van, improving fuel economy by 25 percent to 15 mpg. The hybrid runs a similar route and now uses only 1,333 gallons, a reduction of 334 gallons per year or 20 percent from the conventional vehicle. At $3.80 per gallon, the business saves (334 gallons * $3.80 per gallon) = $1,269 per year over a do-nothing scenario. If fuel prices jump to $4.56 during a fuel price spike, the hybrid savings jump to $1,523 per year. So, in the do-nothing scenario, fuel expenses would have increased 20 percent ($7,602 / $6,335) after the fuel price spike. But by choosing to purchase a hybrid van, a company reduces its fuel costs by 4.1 percent ($6,078 / $6,335) in the face of a 20 percent price spike.

Most businesses operate more than one vehicle, so the savings scale as you deploy vehicles. This type of analysis is useful even for a business that deploys a small number of hybrids in a large fleet.

Small steps can have big impact; create competitive advantages

Managers do not have to take extreme efforts to start reducing fuel consumption. There are a number of ways to increase fuel economy, such as vehicle downsizing, reductions to driver idling, and smaller deployments of hybrid vehicles, rather than a fleetwide rollout. Even small increases to fuel economy, which can be achieved by choosing a smaller engine option for example, can start to reduce fuel cost volatility. Businesses can reinvest the savings in deploying more efficient vehicle alternatives, creating a positive cycle of reducing fuel use, reducing fuel cost volatility, and investing in more efficient vehicles.

Purchasing more efficient vehicles creates real value and cost advantages against competitors and creates business investment opportunities that laggards will miss. Furthermore, reducing your company’s exposure to volatile fuel prices reduces uncertainty in your future business costs.

While it may at first seem counter intuitive to think about investing in the face of higher and more volatile fuel costs, remember that your company will be in a position to invest savings in growing the business or implementing more efficiency improvements, while others are sending more money to oil companies. By calculating the benefits of hybrid vehicle fuel savings in volatile oil price scenarios, we can convince senior executives that vehicle efficiency improvements create value and reduce uncertainty.

For further information see Institute of Transportation or XLHybrids.

Car image via XLHybrids.

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