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[Market Watch] Primed at the Pump

Market Watch

Finally, some relief at the service station. But how long will these lower gas prices last, and what’s fueling the decrease anyway? PCT reports on the economics of today’s oil cost decreases and what this means for budgeting and operating your pest control firm in 2015 and beyond.

January 27, 2015

When Donnie Blake drove by the gas station in October 2014 on his usual route home from the offices of OPC Pest Control in Louisville, Ky., he did a double take. And his jaw dropped. He immediately changed plans to drive straight to his house, and instead turned into the service station, parked by a pump, and fueled up his truck.

He told his technicians to do the same.

“You can’t trust the marketplace of gas,” Blake says.

“It’s a complete, utter shock,” he remarks of the dramatic decline in gas prices in the fourth quarter of 2014. “I literally thought the gas station sign couldn’t be right.” It read $2.34 per gallon one day, and Blake urged his technicians to keep their tanks full to take advantage of the deal. OPC Pest Control runs about 65 vehicles.

The price decline was especially unusual for Louisville, which tends to maintain higher fuel prices, Blake says, because of little competition among oil suppliers in the area and the reformulated gas that the Environmental Protection Agency (EPA) makes larger cities use to better manage pollution. Blake was used to fueling up at stations near his lake house 70 miles outside of the city to get the lower prices. As in, $0.60 cents or so lower, on a regular basis. That was in the first part of 2014.

Now into 2015, prices at the pump are stable and low. The national average gas price was $2.54 on December 15, 2014, according to the AAA Fuel Gauger Report, where you can check daily prices at the pump at a national or local level.

Meanwhile, just north of Blake’s operation, Scott Steckel of Varment Guard Environmental Services in Columbus, Ohio, says gas prices bumped back and forth between $2.50 and $3.00 during late fall, and he was seeing a $0.20 cent swing depending on the week. But overall, the consistently lower prices than previous years meant extra dollars to spend on other expenses since he accounted for an average $4 per gallon in his monthly fuel budget. (The “found money” was immediately absorbed by increasing health insurance costs, Steckel reports.) What’s going on with gas prices?

Will these low numbers at the pump stay around for a while longer — and what can pest control operators do to budget for such a volatile expense? In July 2008, gas prices hit an all-time high of $4.11 per gallon. (That adjusts to $4.43 using the June 2014 Consumer Price Index.) Now, we’re seeing gas prices at nearly half that amount — and who expects the price of any commodity to decrease, let alone sharply decline as years pass?

“We are seeing a significant drop in oil prices that we have not seen since the first year of the Obama administration,” says James L. Williams, president of WTRG Economics in London, Ark. Williams has been forecasting gas prices for 34 years as a senior economist and has run his own consulting firm for the last 15.
 

 

History seems to be repeating itself to some degree. Williams expects gas prices could dip even lower than the December average, mimicking when oil prices dropped from $145 to $33 a barrel in late 2008 after Obama won the election.

Even if this dramatic of a swing down doesn’t happen, we’re already back at the same pricing we saw seven years ago. That’s baffling in many ways.

“Any business that is big in transportation is going to see benefits,” Williams says, adding that PCOs should plan on lower gas prices in the first half of 2015, and increases as the year wears on. For now, OPEC lowered prices to compete with the average $100/barrel cost the U.S. has been able to achieve for the last several years due to increased production here.

Steckel isn’t an economist, but he keeps a close eye on the news and he knows that a decreased dependency on foreign oil has been a good thing for his company’s fuel budget. He says, “Ten years ago, we were getting most of our oil from countries that were fairly hostile toward the U.S., and so we were at the mercy of OPEC setting the barrel price, and today we have much less reliance on overseas foreign unsupportive countries for oil and there is much more homegrown U.S.-based petroleum development, as well as in Canada.”

What does Steckel think will happen to gas prices? “It depends on where we get the gas from,” he says.

 



 
 

Drilling Down the Cost.

Gas prices evolve from a complex geopolitical minefield. There’s a supply and demand tug-of-war, along with a web of stressors that pull at pricing. Revolutions, government sanctions, technological innovations, competing governments, the collapse of countries — it takes the perspective of an economic brain/history buff to unravel the “why” behind gas pricing. Williams is that kind of guy.

Williams worked at Alan Greenspan’s consulting firm during the pre-Internet era, and he went on to forecast petrochemical prices in Texas. “I’ve been through the 1981 to 1986 drop in oil prices when the Saudis cut production down from 10 million barrels a day to 2 million to maintain the price,” he says.

Today, OPEC has decided not to cut production, but rather to lower their prices to compete with the U.S. market, which has grown exponentially and now provides in excess of demand here, Williams shares.

Consumers Will Have More Money In Their Pockets in 2015 Thanks to Falling Fuel Prices

The average U.S. household is expected to spend about $550 less on gasoline in 2015 compared with 2014, as annual motor fuel expenditures are on track to fall to their lowest level in 11 years. Lower fuel expenditures are attributable to a combination of falling retail gasoline prices and more fuel-efficient cars and trucks that reduce the number of gallons used to travel a given distance.

Household gasoline costs are forecast to average $1,962 next year, assuming that the U.S. Energy Information Administration’s (EIA) price forecast, which is highly uncertain, is realized. Should the forecast be realized, motor fuel expenditures (gasoline and motor oil) in 2015 would be below $2,000 for the first time since 2009, according to EIA’s December 2014 Short-Term Energy Outlook (STEO).

The price for U.S. regular gasoline haD fallen 11 weeks in a row to $2.55 per gallon as of December 15, down $1.16 per gallon from its 2014 peak in late April and the lowest price since October 2009. Gasoline prices are forecast to go even lower in 2015. Gasoline prices are falling because of lower crude oil prices, which account for about two-thirds of the price U.S. drivers pay for a gallon of gasoline.

Increases in fuel economy are also contributing to lower motor fuel expenditures, as cars and trucks travel farther on a gallon of gasoline. According to the Environmental Protection Agency, the production-weighted fuel economy of cars has increased from 23.1 miles per gallon (mpg) for model-year 2005 cars to almost 28 mpg for model-year 2014, an increase of about 21%. Similarly, the fuel economy for trucks has increased 19%, from 16.9 mpg to 20.1 mpg in the same time frame.

In recent years, gasoline expenditures have accounted for about 5% of household expenditures. In the Bureau of Labor Statistics’ (BLS) Consumer Price Index, gasoline accounted for 5.1% of consumer spending, as of October 2014. Reductions in the gasoline price ultimately impact the relative weight of gasoline compared to other expenditures (shelter, clothing, food, entertainment, and so on) in price indices compiled by BLS and the Bureau of Economic Analysis at the U.S. Department of Commerce. (Source: U.S. Energy Information Administration)

Williams wouldn’t say he’s seen it all in his career. Because who knows what could happen next with oil prices? (Who knows what will erupt next in the MENA countries? That’s an oil acronym for Middle East North Africa.) But Williams’ targeted predictions catch media and economists’ attention and his numbers generally align with what the U.S. Energy Information Administration (eia.gov) rolls out in its regular reports. (See related story at right.)

There’s a lot to consider when predicting petrochemical prices, Williams explains. The results of pricing are multi-faceted. And at the end of the day, what Steckel said is true: Now that the U.S. is less dependent on foreign oil, OPEC recognized that the only way to win back market share — and keep their oil businesses running strong — was to lower prices and compete.

The good news: It costs less to fuel up your vehicle now in the United States. The other side of the barrel: Oil companies have been providing tremendous job growth for the U.S. economy in the last four years, and these businesses are slowing down because of lower overseas pricing. The fact is, it costs less to produce oil in those MENA countries and in other places like South America, Williams explains. The lower OPEC prices per barrel are slowing down U.S. oil production. Drilling companies, like any business, have a break-even point. When it costs more to drill and produce oil than what they’ll make in profit, they produce less. That’s what’s beginning to happen now, Williams says.

“If you were an investor, would you want to buy into an oil company right now after essentially seeing a 40-percent drop in the price of their product?” Williams relates. “People have a tendency to think that oil companies are different than any other (business), but they’re exactly the same. If the price is good enough, they can produce more. And if the price is not good enough, they can’t. And, the bankers view them the same way. If you had a bad year, your banker would not be as interested in loaning you money for a new truck.”

So the low gas prices are good news for service businesses like pest control operators that need to fuel routes. And, the prices at the pump might also be good for pest control companies’ customers — maybe. That is, unless the customers are in the oil business or related fields, and for PCOs servicing accounts in Texas, Oklahoma, North Dakota, Louisiana or other oil-producing regions, customers might not feel so full in their pockets about the lower gas prices. It all depends.

That said, Williams says for the most part, the lower gas prices will “improve growth across the world. Overall, you’ll be looking at gas prices next year [in 2015] that will be about $0.75 to $0.80 cents per gallon lower than they were on average for this year.”
 

Running on Less.

There’s a constant watch on gas prices for any service business that depends on transportation to get the job done. And since fuel prices spiked and remained high for the last six years, companies have learned how to deal with the prices. You can’t just eat the cost if you want to survive. So savvy business owners take other measures. And now that gas prices are down, their efforts are paying even greater dividends.

At The Bug Master in Austin, Texas, a change over to fuel-efficient vehicles saves an average $2,000 to $3,000 per month in gas bills. The $5-million pest control firm runs about 50 vehicles, and its cars are now mostly Toyota Yaris or Nissan Versa. “We actually did look at hybrids, but the acquisition cost over time didn’t justify going to that type of vehicle,” says Dauphin Ewart, president.

Service vehicles are bigger gas guzzlers. A basic Ford F-150 or Chevrolet Silverado gets you 15 to 18 miles per gallon (Silverados at the lower end of the mileage per gallon). Meanwhile, a Nissan Frontier or Tacoma averages in the low 20 miles per gallon for Ewart’s technicians. “That makes all the sense in the world,” he says of vehicle buying decision impacting the gas budget.

As for lower pump prices, not so much. Every little bit of savings helps, but Ewart figures that the fuel cost is an average 3 percent (maybe 5) of the overall budget. For every $10,000 in revenue that’s a $300 gas bill, and a 10 percent decrease in cost is a $30 savings. “You can definitely see the savings,” he says, doing the math times 50 vehicles. “But I don’t know that gas prices are the best place to fret if you’re trying to manage costs.”

At The Bug Master, purchasing fuel-efficient vehicles was absolutely worth it. And so is using GPS to ensure efficient routing and fewer miles traveled per technician, per day, Ewart adds.

At Varment Guard, Steckel says the lower gas prices could prompt his company to decrease the “fuel allowance” built into the service cost. The company now allows for $4 per gallon, and Steckel will see about moving that price down to $3 per gallon in July when the company typically examines price increases. (Steckel doesn’t touch prices when pest pressure is down, and he finds customers are more susceptible to increases when they need the service in mid-summer, June or July.)
 

 

Reducing mileage per route has been critical for saving the gas prices during expensive times, and Steckel has the process down to a science. He averages miles between stops — generally 7 miles for commercial accounts and 4 miles for residential — and works the cost of fuel at a $4 per gallon price per mile. So, that’s about $28 for commercial accounts and $21 for homeowners. If prices decrease and he opts to give customers a break (that depends on what the competition does, he says), that’s a small savings for clients and a loyalty win for Varment Guard.

As for the extra dollars collected but not spent on gas in late 2014 and the first half of 2015 — and you can figure about $4 per account — Steckel says other increasing business expenses quickly absorb the savings. Like health insurance. And the cost of procuring products before the seasons starts. Or buying new bed bug equipment.

Lower gas prices are giving businesses like Steckel’s, along with other PCOs and service industry operations, a bit of a break. But there are rising costs of doing business that need to be fed dollars. So, the reprieve from fuel can be filtered into another budgetary silo, and that’s a good thing.

But you know who might be even more excited about the lower gas prices? People who spend money on services like pest control, Blake suggests. “More disposable income for customers is just as important to me as what I’m saving on gas,” he says. “What impacts our customers’ budgets is going to impact our sales and our receivables.” This is especially true since OPC Pest Control has focused on growing its residential client base, which is now 65 to 70 percent of the company’s service mix, up by 10 percent over last year.

While winter brings higher utility prices, if people are spending less at the gas station they might feel just rich enough to say yes to that extra service or at least not cancel. This is good news for adding new business, and getting paid, Blake says.

“The more money customers can keep in their pockets [from lower gas prices], the more likely we are to keep our receivables down,” he says.

The one sure thing about gas prices is that they’ll change. So, what next?

Williams is saying that the low gas prices we see now are not going to spike back up any time soon. But, he expects the first half of the year to be more favorable at the pump. His conservative advice to service operations that depend on transportation: “Stick with the plan.” In other words, don’t expect a windfall from saved dollars not used at the pump to finance huge expansion. “It’s sort of like lottery winners,” he relates. “Quite often, they go out and buy a bunch of stuff and borrow a bunch of money to do so. So, if you’ve been wanting to buy a new truck and the profit is there, write a check for that truck.”

Pest control companies could see some increase in sales as a result of consumers’ relief when they get their gas bills. But not much, Williams says. “[Gas prices] aren’t going to be a big game changer on the sales side of things,” he says. “It’s more on the cost side of things, and there you need to be careful because we don’t know how good the prices will be in the second half of the year.”

 


The author, a freelance writer based in Cleveland, Ohio, is a frequent contributor to PCT magazine.

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