By Michael Pistol
With the summer holidays in the rearview mirror, perhaps now is a good time to take stock of the real economic world by continuing our analysis related to the price of fuels.
This month we’ll be discussing the effects of lower prices over your dealership retail activity.
To properly understand why fuel prices may actually go lower, one may have to go back to basic economic fundamentals: Fuel derives value from its availability. Once you produce it, you can burn it and need to produce more.
But if you don’t burn that much, nationally, the price will go down until the stockpile excess is exhausted (gasoline/diesel are formulated according to the season) and the inventory cycle can start anew.
Another thing one must remember is that oil is used directly or indirectly in the production of 95 per cent of all industrial goods. As demand for these goods diminishes, so drops the price of oil.
Most global economies are still trying to get out from the Great Recession. Although Canada is doing comparatively well to the rest of the world, storms are already gathering at the horizon. In a recently released report the UBS Investment Research has reduced its growth outlook for Canada’s GDP to 3.1 per cent for 2010, down from a previous estimate of 3.5 per cent.
It is also estimating an increase of just 2.8 per cent compared to its previous outlook of 3.2 per cent growth for next year.
Those figures are not too bad when compared to the United State’s rather paltry below 1 per cent in the second half of this year. And here’s the big bubba – Canada still exports 73 per cent (as at the end of 2009) of all goods to the U.S.
Also, despite all the Chinese white noise, the U.S. is still the world’s largest fuel consumer: In 2009 world oil consumption was 84 million barrels and the U.S. alone was responsible for about a fifth of the total.
As the U.S. economy slows down, the oil surpluses expand driving down the costs of fuels. American retail gasoline prices were already falling heading into Labour Day weekend reaching its second lowest price of the past five summer driving seasons.
In Canada, the slack was eaten by the introduction of HST in Ontario and B.C., a much stronger economy, and an overall increase in fuel demand due to the summer holiday season. But be aware, things could dramatically change soon:
Keep in mind:
• Peak oil: According to the BP Statistical Review, there are 30 per cent more proven barrels of oil today than there were 20 years ago. Experts agree that we probably have used only about 40 to 50 per cent of recoverable oil.
• EIA forecasts that OPEC members could earn $752 billion of net oil export revenues in 2010 and $821 billion in 2011. It is true that those totals are never enough, but with tensions escalating in certain regions, it’s almost sure OPEC won’t push for higher prices.
• Credit Suisse cut its outlook for 2010 U.S. light vehicle sales to 11.4 million cars and trucks from 12 million meaning there will be less fuel needed.
• Climate change is opening up Russia’s vast Siberia oil resources.
Yet, the largest single threat to our industry is the expected economic downturn or dreaded double-dip. Despite a cut in interest rates from 5 per cent to zero and almost $3 trillion to shore up the financial system, the U.S. economy is still sinking.
So what do can you do as a car dealer reading this and thinking of the future? Once again, you can act or react. In the case economy starts tanking again, here a few suggestions:
• Make more money by forgetting JIT (just-in-time). Buy in bulk, pay less and pass savings to the consumer making darn sure they know about it. Prudent stockpiles of essential materials (parts, wearables) including resources have been the hallmark of civilization, so be civilized.
• The Canadian market place is an odd in the sense that it’s moving upwards and is aspirational and upscale. Remember, the problem is that Canadians don’t want small cars, they want prestige fuel-efficient cars/trucks so stock up with brand name, but fuel-efficient vehicles.
• This is a captive market because people have to drive to work. A very recent Harris-Decima poll says 57 per cent of respondents feel more secure in their jobs than a year ago; 47 per cent think the economy is doing well. How can you square the round hole? Simply offer lower MSRP tied to job security (payments) instead of incentives.
• Remember, all countries have two economies: the official one and a shadow version. Why won’t you take advantage of “I’m-paying-no-tax” mentality? Pay a small portion of the dreaded HST (where applicable) and advertise it properly.
Michael Pistol is an independent automotive analyst and publisher. He can be reached at email@example.com