The price of fuel and its influence over Canadian dealership activity

By Michael Pistol

As the dog days of summer set in, it’s time to make plans for the second half of the year.

A quick perusal of H1 monthly sales reports – as of the end of June – shows a clear shift in consumer preferences: The frugal passenger cars are out (-2 per cent) while the gas guzzlers are in (+27.2 per cent). Although it may be unfair to call all light trucks guzzlers, the trend, nevertheless, is worrisome.

Could it be that fuel prices sudden fluctuations could once again derail our industry?

This month, we’ll be discussing the effects of increased prices over your retail activity.

One of the most common planning mistakes is made when fuel prices (diesel and automotive gasoline) are tightened mostly to the price of oil.

In the last decade and particularly in the last several years, the price of North American fuels are increasingly dependent, not as much as on supply (oil) and demand (physical consumption), but on speculation and forex activity, natural and man-made disasters, stock market influences, taxation/regulation, and, most importantly, refinery load capacity.

Influencing issues

Refinery capacity is quickly becoming the most important factor on fuel prices. With surplus refining capacity relative to demand, we’ll see a major shift from the West towards East, punctuated by more the closing of North American refineries – case in point, Shell’s recent plans for its 77-year-old refinery in Montreal: The oil giant set off a political firestorm when it announced plans to convert Canada’s largest refinery into a distribution terminal.

Meanwhile, China’s very modern and efficient crude oil refining capacity is already ranked second in the world. It reached 477 million tons by the end of 2009.

Just to grasp the importance of refining capacity over fuel pricing, consider that British Petroleum Plc posted a $17 billion loss in the second quarter after a $32.2 billion charge for the oil spill, yet its U.S. refining operations made a profit of $757 million in the second quarter alone.

BP had refining losses in the first quarter and during 2009. Expect the trend to continue.

Speaking of BP, the Gulf of Mexico spill is also indicative of the (financial) dangers oil companies must face when operating in hostile environments. Tropical storm Bonnie recently managed to shutdown 28.3 per cent of Gulf’s oil production, briefly sending the price of oil just above the $80/barrel mark.

Regulation and taxation are also issues to grapple with: Summer gasoline is more expensive to make -- volatile organic compounds are regulated -- and gas prices normally rise as much as 10 to 15 cents a litre. Currency also plays a major role: as the Loonie goes down, the price goes up.

Add the HST in B.C. and Ontario (half of the Canadian economy), and a new picture emerges.

Yet, the most compelling argument for a price rise rests with the economic recovery and increased demand. Granted, the gloom and doom (double dip?) is out there, but one must remember that the big 500 largest non-financial North American companies are sitting on almost a trillion dollars (second-quarter data), and that money pile is growing larger every quarter. When that money is eventually unleashed into our integrated economies in the form of hiring, capital expenditure and inventory replacement, watch out: Demand will most likely outstrip supply.

Your plan

You can act or you can react; the choice is yours. One way has results, the other consequences.

Competition will surely increase, so differentiate yourself: Extending your backshop hours and increasing work shifts as part of an effort to accommodate your customers’ budgets and schedules could be vital. Shuttles may also help.

Reconsider these fuel-savings aerodynamics: Granted, they are out of style nowadays, but if pushed properly it could do miracles for your bottom line. Large, good- quality images of the vehicle equipped with aerodynamic fairings will resonate fantastically well with the younger set. Remember, all they want is the justification for those good-looking add-ons.

Inventory: Usually, you’re stuck with your OEM’s inventory. Do what you can to improve the fuel-saving image of your dealership’s stock. Perhaps, a local advertising campaign. For the dealer principals at multi-store, family-owned enterprises, the job may be a touch easier as inventory could be amalgamated – especially the used stock.

For the near future, barring unexpected economic developments, the consensus is that Canadian gasoline prices will range between 97 cents and $1,10 per litre.

Be sure to check out our Market News: Trends column next month for an explanation and tips on how to profit from a possible decrease in the price of oil.

Michael Pistol is an independent automotive analyst and publisher. He can be reached at mpistol@tjaa.ca