High fuel costs are here to stay for the foreseeable future. With both gas and diesel prices at historic highs and no end in sight, here are some ways to protect your business.
Why we can't drill our way out of high oil prices
With gas and diesel prices surging, businesses with employees that operate vehicles for work are hoping for some kind of relief. But relief from paying $4 or $5 per gallon is nowhere in sight. Yes, the U.S. is one of the world's top producers of crude oil, and yes, the U.S. holds massive untapped reserves (somewhere on the order of 38 billion gallons). But that does not mean we can drill our way out of this.
The U.S. consumes almost twice the amount of oil that we produce. We import most of our oil from Canada (4 million barrels per day), followed by the Middle East and Mexico (700k and 500k per day, respectively), so we were not dependent on oil coming from Russia, which has been banned from imports due to the invasion of Ukraine. However, the U.S. does not control the global price of crude oil. OPEC, which includes 15 nations (not the U.S.), exercises the greatest influence.
Furthermore, the U.S. consumes a different type of oil than we produce. We produce a light crude, more like water, and we import a heavy crude like syrup. U.S. oil refineries are built to process the heavier crude we import more than the lighter type we produce. So we cannot just ramp up domestic production and reduce fuel prices that way.
Finally, the International Energy Agency has said that no new oil and gas prices should be approved if we intend to limit the global temperature increase to 1.5 degrees Celsius. With climate change always a factor in international economics, there is no quick and simple way to reduce fuel prices right now.
3 ways NOT to combat high fuel costs
With so many businesses trying to find ways to limit their fuel costs, a number of bad ideas are out there. Each of these approaches will likely lead to costly complications and long-term problems for your organization.
1. Add a fuel card or reimbursement.
Most organizations already pay a car allowance or mileage rate to offset business vehicle expenses. Adding a credit card for gas purchases or reimbursing gas purchases directly seems intuitive during times of high fuel prices. However,
- personal use is difficult to distinguish from business use
- employees control what vehicles they drive; many drive gas guzzlers
- without substantiation of business use, fuel cards must be taxed
- accountability and substantiation require significant administrative work
2. Pay the IRS mileage reimbursement rate.
Some organizations that pay a car allowance or a modest mileage rate will consider switching to the IRS mileage rate. In theory this makes sense because the IRS takes into account gas prices when setting the rate each year. But there are three inherent challenges:
- the IRS rate is based on last year's average vehicle costs and does not account for regional variations or price spikes
- the IRS rate over-reimburses high-mileage drivers and under-reimburses low-mileage drivers
- paying a mileage rate and keeping it non-taxed requires adding mileage tracking and reporting
3. Raise the company car allowance by a set amount.
The simplest approach is to just increase the monthly stipend employees receive until high gas prices subside. But this simplicity does not address the true complexity of how fuel costs factor into business expenses:
- Any amount added will be reduced by 30-40% because of taxation (plus the company pays more in payroll taxes)
- As with the IRS rate, regional differences in prices cannot be fairly addressed by a set amount
- This approach is not scientific or data-driven and cannot be defended
6 ways to rein in business fuel costs
Fortunately, there are several ways you can immediately do something to combat the high gas and diesel prices.
1. If you are paying a flat, taxable car allowance, STOP.
You can recoup 25% or more of these costs by switching to a non-taxable program. The IRS mileage rate is the most popular, but a FAVR allowance is by far the most cost-effective.
2. If you already offer a fuel card, implement a stricter policy.
Add limits to how much fuel can be pumped per week or on which days it can be pumped. Enforce penalties for violations.
3. If you offer a fuel card or a company vehicle, modify your personal use policy.
Make sure you are enforcing a clear policy that charges back employees for the personal use of fuel or company-owned vehicles.
4. If you are not job costing, add a fuel surcharge for services rendered.
It is fairer for customers to pay for the increased fuel expenses than for employees to sustain these costs.
5. If you do not use a mileage app, adopt one.
Requiring employees to use a mileage-tracking app in order to receive their car allowance or reimbursement can provide both accountability and helpful data on business productivity and fuel use.
6. Adopt a data-driven approach to calculate a new rate.
In the era of mass data collection, it is possible to pinpoint the optimal reimbursement rate for any employee, based on their location and job responsibilities. mBurse can supply this data – or calculate the rate for you.
Employee expense indemnification and fuel costs
If you have employees that work in a state like California or Illinois that indemnifies employees from all business expenses, then you face a particularly urgent situation. In those states, you have to be able to prove that your car allowance or reimbursement fully covers all vehicle expenses incurred for work purposes – including ownership costs like insurance and depreciation. And unfortunately, California consistently has the highest gas prices in the country.
Even if you do not have employees who work in one of those nine jurisdictions, you still face the issues of fairness to employees and retaining good workers. How will you ensure that employees are shielded from all fuel cost increases while protecting your organization from unsustainable costs increases?