The recent spikes in gas prices may rise further. A couple of weeks ago, we discussed how prices at the pump can impact car reimbursements. Today let's take a step back and look at the bigger picture.
Why are gas prices soaring in 2021?
The country is approaching an average gas price of $3.00/gallon, with certain regions experiencing especially severe spikes. In Waco, TX, for example, fuel prices are $.75/gal higher than at this time last year.
So now everyone is wondering:
1. How did this happen?
2. When will it stop?
3. What can I do to lessen the impact?
Why are gas prices increasing now, just as sheltering in place is loosening in several states? It’s a legitimate question that needs to be answered. Unfortunately, the answer is more complex than just one thing. Here are three forces currently pushing gas prices higher:
Increased demand for gasoline in 2021
Now that the vaccine is being distributed more regularly across the country and millions of people are being vaccinated, millions of people are traveling. You can see the numbers as families and spring breakers travel increased this year by over 72% from last year.
Oil production and supply challenges
The February 2021 snowstorms in Texas halted oil production. This compounded the reduction in oil production and drilling, which slowed almost a stop in 2020 because of the pandemic and a Saudi-Russian price war. Oil production was on the uptick before the arctic blast, but a month later, refineries have only returned to 80% of production levels, seeking to make up for February losses by selling stockpiled oil at today's higher prices. Plus, refineries typically slow production while switching from the winter mix to the summer mix of gasoline.
OPEC's regulation of global oil supply
OPEC regulates and coordinates oil supply and pricing. OPEC has played a balancing act, ensuring that drilling and pricing don’t outpace the demand, which stayed low throughout 2020. Because OPEC slowed the production of crude oil, recent increases in demand caused prices to spike. Just this past week, OPEC decided to gradually increase oil output from May through July – but only by a small amount.
How high fuel costs impact your business
Oil and gas prices will affect your business no matter your industry. Not only will the costs of operating vehicles increase, whether heavy equipment or vehicles for transportation/travel, but so will prices of goods that your company purchases, due to other industries' increased transportation costs.
If you have mobile employees that travel for work, high prices at the pump can be especially concerning. If your vehicle reimbursement or car allowance does not track with gas prices, it could expose your employee’s income to the high and volatile costs of operating their vehicle, and they will take matters into their own hands, which could negatively impact your business.
Much of the impacts depend on your vehicle reimbursement policy. Let's look at how each method is affected by gas prices:
Car allowance – Employees are going to protect their income or costs by driving less. If your employees travel less, you could see productivity negatively impacted. This is especially concerning now that vaccinations are allowing more people to travel again.
Mileage reimbursement – High gas prices encourage workers to drive or report more mileage. If you pay $.56/mile (the current IRS rate), an employee can more than recover the increase in fuel costs by simply driving more, since a $.50/gal increase only amounts to about a 2-cent increase per mile (at 25 mi/gal). You will likely see a spike in mileage and costs when fuel prices increase.
Company vehicle – Costs typically increase during higher fuel cost periods. Not only is the company already paying for or reimbursing fuel costs, but employees will tend to use the company vehicle for more personal trips than normal.
Fuel card – Similarly to a company vehicle, fuel costs typically increase for the company beyond just the increase at the pump because personal use of the gas becomes more attractive.
How long will the high 2021 gas prices last?
Traditionally gas prices start to increase in April as the refineries start to switch from the winter mix to the summer blend. During this time, the refineries stop production while they make the changes. Fuel prices continue to increase through July as more and more people hit the road for vacation.
It would be reasonable to expect this normal increase to be even higher in 2021, as more people are vaccinated and hit the road for a much-needed change of scenery. This means your vehicle reimbursement program could end up costing as much as 35-40% more in costs (if you pay a mileage or fuel reimbursement) or in productivity losses (if people elect not to travel to manage their personal costs).
What can your business do about gas prices?
There are a handful of practical ways to address the higher gas prices and protect your organization from unmanageable fuel costs or productivity losses:
Manage business travel and fuel card use
Keep a close eye on business travel and fuel costs if providing a company vehicle or fuel card. Make changes to behavior to reduce costs, maybe implementing a cap on when or how much employees fuel during these times (e.g. No fuel use on Fridays and Monday).
Modify your current vehicle reimbursement policy
Review your options. How do you know you have the most efficient vehicle reimbursement policy? Does your reimbursement automatically change when fuel prices significantly increase or decrease? Or do you have another plan when fuel prices significantly increase or decrease?
Making your vehicle policy more responsive to rapid changes in costs can go a long way to not only control company costs but also make employees feel valued – that management took time to look at the situation from their perspective as the ones most immediately experiencing higher prices.
Get practical help and guidance from an expert
At mBurse we have solutions to help either manage your existing policy or solve your vehicle reimbursement inadequacies. This could mean providing our mileage app (mLog) to help measure mileage without big brother. Or it might mean using one of our reimbursement solutions to provide a fair, defensible, and accurate reimbursement that is non-taxed. Either way, we can help.