What a difference three years make.
In 2012, the national annual retail average for regular gasoline hit an all-time record of $3.60 per gallon. For 248 days of the year, national daily average retail price records were broken. Former House Speaker and presidential candidate Newt Gingrich promised voters gasoline at $2.50 per gallon, less dependence on foreign oil and the United States’ status as the largest oil producer in the world by the end of the decade.
It’s only been downhill—or uphill, depending on your measure—from there. National average gas prices for most of 2015 have trended below $2.50 per gallon and promise to flirt with the $2 mark by December.
The United States is now the largest oil producer in the world, having bypassed Saudi Arabia and Russia. And consumers are finally—finally—shaking off their recessionary haze to spend, drive and consume more.
“The psychology of what we went through has been driven deeper than people think,” says Doug Haugh, president of Mansfield Oil Co., Gainesville, Ga. “We won’t just jump back to our old ways.”
Haugh’s company supplies fuel to high-volume fuel retailers, local and state government, manufacturers, construction businesses and more. (Mansfield sold its retail dealer business to Empire Petroleum Partners last year.)
Despite a perceived lag in consumer spending, Haugh sees strength at the very bedrock of the economy. “We see really good demand in economically sensitive cyclicals—rock, steel, wood—all of the inputs to building things and fundamental increases in underlying demand,” Haugh says.
The trickledown effects of a burgeoning economy and low crude and fuel prices are still playing out. The following pages present snapshots of how the bear energy market is shaping everything from consumer purchasing and driving behavior to the competitive potential of alternatives.
Monthly National Gas-Price Projection
According to senior petroleum analyst Patrick DeHaan of GasBuddy, national average retail gas prices for the second half of 2015 will flirt with the below-$2 mark. His predictions, below by month, have been spot on as of early September.
- July: $2.75
- August: $2.54
- September: $2.43
- October: $2.28
- November: $2.10
- December: $1.98
Table of Contents
Demand Snaps Back
Prying Open Consumers' Wallets
Diesel Has Its Day
Industry Views: $1.99? Are You Out Of Your Mind?
Demand Snaps Back
They’re b-a-a-a-ck.
“There’s no question that more people are driving … and they are driving greater distances,” says Tom Kloza, global head of energy analysis for Oil Price Information Service (OPIS), Gaithersburg, Md. He chalks up the trend to lower unemployment, which had fallen from 9.6% in the heart of the recession to 5.3% as of June 2015, the most recent month reported.
According to the most recent data from the U.S. Federal Highway Administration, vehicle miles traveled broke a record for the first four months of the year, hitting 988 billion miles. Year-over-year miles driven have increased 3.9%.
“We have recovered all of the lost miles driven from the recession,” says David Portalatin, a Houston-based executive director and industry analyst for The NPD Group Inc., Port Washington, N.Y. As of April 2015, vehicle miles traveled have eclipsed the November 2007 historical peak.
“If we’ve just recovered what was lost, are we truly on a historical new trajectory for continued growth? That remains to be seen,” Portalatin says. “What’s not in doubt is that right now, miles driven is growing at a nearly 4% rate, which is kind of the old normal, going back to prerecession days.”
And these increased vehicle miles traveled are showing up in fuel volume sales figures.
David Nelson, professor of economics at Western Washington University and founder of Finance & Resource Management Consultants Inc., Bellingham, Wash., oversees study groups involving 250 companies that collectively represent about 10% of the fuel sold in the United States. A same-firm sample of 88 companies operating almost 5,000 c-stores shows year-over-year increases of 2.2% per retail location for the 12 months ending in April. The monthly change from April 2014 to April 2015 is 3.3%.
“More miles driven has won out in the short run over improved fleet efficiency, resulting in a 4% year-over-year gain in gasoline consumption,” Nelson says, citing a figure from the Energy Information Administration (EIA). He partly credits a shift among consumers in the types of vehicles they are buying, from 45% trucks and SUVs at the 2008 oil-price peak to 55% truck and SUVs more recently.
That said, analysts are not so sure that this demand revival has long legs. “I think it would be wrong to mistake this as a trend that will continue through the rest of the year and indeed through 2016 or 2017,” Kloza says.
First, he acknowledges that fuel-economy averages recently have fallen and stalled. According to the University of Michigan’s Transportation Research Institute (UMTRI), the average fuel economy of new vehicles sold in July, the most recent month tracked, was stuck at 25.4 miles per gallon (mpg). UMTRI cites growing market share for vehicles that have middle-of-the-road fuel economy, such as crossover SUVs.
However, this July average is still a 5.3-mpg improvement in fuel economy since the UMTRI first began tracking the measure in October 2007. It is being pushed upward as vehicle manufacturers attempt to hit higher Corporate Average Fuel Economy (CAFE) targets, which requires a combined 54.5-mpg fleet average by 2025. Even the large SUVs and trucks are becoming more fuel efficient, compared to previous model years.
“With some analysts suspecting an annual rate of 18 million [cars sold], one has to believe that this is just a lull in the efficiency gains and that mpg standards will improve,” Kloza says. “This may be a bit of a Goldilocks economic picture, so this summer’s gasoline demand numbers may represent peak levels.”
He also cautions against relying too much on the EIA demand figures. That’s because they measure the disappearance of gasoline or diesel from wholesale, not real gallon sales at retail.
An OPIS survey of more than 6,000 gas stations across the country shows a 1.7% lift in volumes for the week ending July 18, 2015, vs. EIA’s volume-increase figure of 3.7%.
One might conclude, based on June and July weekly estimates of gasoline demand, that 2015 will see the highest annual demand on record, topping the 2007 record number of 9.286 million barrels per day.
“I don’t think we’ll see that record topped,” Kloza says. “I suspect that record will stand for the rest of the decade, and that we’ll be close to the 9.1-million-barrels-per-day demand figures that represent the third and fourth spots in terms of all-time annual highs.”
Volume Trends
More than 58% of gas stations in OPIS’ demand survey saw volumes rise during the week ending July 18, 2015, compared to a year ago. The average increase was 3.1%.
| Volume change | Percentage of stations |
| More than 10% | 28.2% |
| 5% to 9.99% | 13.9% |
| 2% to 4.99% | 9.4% |
| 0% to 1.99% | 6.7% |
| 0% to -1.99% | 6.1% |
| -2% to -4.99% | 8.4% |
| -5% to -9.99% | 10.5% |
| More than 10% | 16.8% |
Source: OPIS
CONTINUED: Prying Open Consumers' Wallets
Prying Open the Wallet
Consumers are paying less for gasoline—the equivalent of about $700 less than they paid in 2014, according to the EIA. Are they spending their savings or pocketing it?
They are indeed spending it, but it took them a while to get there, Nelson says. “As motor fuel prices fell last fall, initially there was a jump in the personal savings rate and retail sales actually fell,” he says. “Part of the decline in retail sales was attributable to the fact that consumers were spending less on fuels. Once consumers began to sense that the energy savings were more than a short-term transitory shock, they began to adjust their spending upward.”
By May 2015, retail sales excluding gas rose 3.5% year over year, Nelson says, citing government data. Among the top 10 consumer spending categories, c-stores have the opportunity to capture a share of this increased spending in food and beverage, foodservice and energy goods and services.
According to NPD data, the percentage of consumers who reported making a purchase at a c-store concurrent with their most recent gasoline purchase occasion increased during the second quarter by about 1 percentage point, a statistically meaningful number, Portalatin says.
In the overall economy, NPD is tracking $1.8 trillion in sales across 17 different industries. In aggregate through the first quarter of 2015, sales are up 3.5% vs. a year ago, “which represents improvement from where we were over most of the post-recession era, so it’s definitely got consumers’ spending trending back in the right direction,” he says.
Study-group data shows year-over-year gains in c-store merchandise sales at 4.0% per retail location for the 12 months ending April 2015. The categories showing strongest growth are packaged beverages, foodservice, salty and sweet snacks, frozen food, edible and perishable grocery, and health and beauty care, Nelson says.
Gus Olympidis, president and CEO of Family Express, Valparaiso, Ind., says his company is experiencing growth in gasoline volumes and in-store sales.
“But it is hard for us to determine if this is attributed to our marketing initiatives or to external factors,” Olympidis says. Family Express has more than 60 stores in Indiana.
“We take a ‘long’ approach to the business,” Olympidis says. “We believe in the human factor, which implies a passion for making each and every intercept with the consumer a rewarding experience. At the end of the day, our business is about several thousand SKUs. Fuel represents four or five of these, and though they are very important, we try not to lose sight of the several thousand at the expense of the few.”
What is clear: Family Express has these customers’ loyalty, likely because it provided a satisfactory fueling experience, and with that comes the likelihood to spend even more. “For 24% of consumers who pay cash for fuel, there is an immediate opportunity because they have more discretionary money to spend in their wallet,” says Portalatin of NPD.
“Even those gas-and-go customers … when they did have a different kind of need—hunger or thirst—they had a very high likelihood of returning to the same retailer that had already served them very well on the fuel occasion,” he says.
There are two elements that are really driving fuel brand choice and consumer traffic, according to NPD research: retailers who are able to differentiate their fuel offer around the quality of the fuel, and reward/discount programs. “As retailers are able to leverage those points of differentiation at the fuel pump, they’ll be able to increase their traffic at the pump, and that will eventually translate into a lift inside the store,” Portalatin says.
CONTINUED: Diesel Has Its Day
Diesel Has Its Day
In mid-July, diesel hit a mark it had missed for the past six years: Its retail average fell below that of regular gasoline. As of press time in early August, the national average for diesel had fallen to $2.67 per gallon, more than $1 below the same time last year. And it will get even lower, says Kloza of OPIS.
“The next 60 days (August and September, as of press time) should see the cheapest diesel prices at the pump that we’ve witnessed since summer 2009 in the Great Recession,” he says. Also, “the diesel market may recover when winter demand and autumn harvests kick in with some additional consumption.”
Oversupply is the main factor driving down diesel costs. Many refineries have upgraded to produce more middle distillates such as diesel, anticipating strong demand in the long term. And many facilities, in a rush to meet current strong global demand for gasoline, are making diesel alongside it. This has provided opportunity for end users and some challenges for competing fuels.
Mansfield’s diesel customers are reinvesting in on-site storage capabilities and self-supply. “With the dramatic concentration in truck-stop operators, their rack-to-retail spreads are phenomenal,” says Haugh. “[If] you’re selling diesel at retail, you’re really happy. If you’re buying diesel at retail, you’re paying through the nose.”
Only a few years ago, Mansfield’s major trucking company clients were ripping out their storage tanks on the heels of new regulations from the Environmental Protection Agency. They were more willing to pay a small, 7-CPG premium on retail diesel than to make a hefty investment in upgraded storage tanks.
Now that situation has reversed itself.
“The payback on infrastructure is almost immediate,” says Haugh. “That 7-CPG premium is gone; even with buying power and the ability to secure discounts, it’s 20-plus CPG. If you’re paying cash prices, it’s almost 50 CPG. That’s a different calculus than what we were dealing with for many years.”
Natural Gas Gets Squeezed
This plunge in diesel prices has affected another piece of Mansfield’s business: compressed natural gas (CNG). In 2014,
Mansfield Energy, parent company of Mansfield Oil, formed Mansfield Clean Energy Partners (MCEP), a joint venture with CNG station developer Clean Energy. The business develops and supplies CNG fueling stations. Its first customer was Mansfield Oil, which has 12 heavy-duty CNG fuel trucks.
“It’s been rough sledding for that business,” says Haugh. The economics today between CNG and diesel are about even, “so that’s not horrible,” he says. (At its best, CNG has enjoyed a $1.50-per-gallon-equivalent advantage on gasoline and diesel.)
“But those capital investments were made with an eye toward pretty dramatic savings against the cost of diesel, and the savings have basically evaporated,” he says. On those capital investments: While pleased with how the CNG-powered fleet is performing, Mansfield is not seeing the dramatic, $20,000- to $25,000-per-truck returns it was initially expecting in fuel savings between CNG and diesel.
“Right now they’re costing the same—and the truck didn’t cost the same,” says Haugh, alluding to the approximate $50,000 premium on CNG-powered trucks. “But we also feel it’s an excellent hedge on the future.”
While the supply of oil over the short term is clearly greater than expected, it is also a more global product, more sensitive to the pull of global demand than natural gas is, Haugh says. “I can go on a futures curve today and lock up natural-gas prices, and don’t get over $4.50 [per million British thermal units] in 10 years,” he says. “That’s as much price certainty as you’re going to have.”
Meanwhile, the waste and municipal bus industries continue to convert to natural-gas-powered vehicles at the same rate as before. “The only thing that would slow [natural gas] down is for it to go outright negative,” he says. “We would have to get to $20-per-barrel crude for that to happen—and I don’t see that in our future.”
CONTINUED: Industry Views: $1.99? Are You Out Of Your Mind?
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