Transportation energy costs are a money pit

July 10, 2006
It isn't unusual for plant managers to concentrate their energy savings plans on production processes and major commercial real estate, but it's the transportation energy costs that are probably higher than you think. Peter Garforth, in his monthly Energy Expert column, identifies the energy savings possible from better management of your fleet.

The energy costs that get management’s main attention are associated with running production processes or major commercial real estate. However, the direct and indirect costs of transportation are an often much neglected opportunity.

In the USA, the largest component of transportation energy cost is oil. Last year, the USA used 9 billion barrels, almost exactly a quarter of world consumption. More than two-thirds was used in transportation. The average price per barrel through 2005 was $54, about 40% higher than in 2004.

This year has seen average prices of $65, with most forecasters anticipating a steady increase for the foreseeable future. Transportation energy is also the largest single cause of greenhouse gas emissions. With this backdrop, it’s not too soon to start getting a handle on the energy cost and climate change impact of transportation, starting with vehicles you either own or lease.

The first step is to identify the current fuel costs, and translate them to relevant productivity indexes. Collecting total fuel cost data isn’t a challenge, but the productivity indexes might not be so obvious.

For example, a salesperson’s car fuel costs could be stated as energy cost per mile, per sales call, or per successful order. The first choice drives focus on vehicle fuel efficiency. The second also focuses on sales call scheduling, including the choice to use videoconferencing or similar tools. The third choice includes all these aspects and adds the ratio of successful to unsuccessful calls. Similar choices exist on the choice of energy productivity indexes for other transportation choices.

Realistically, most companies will initially focus on vehicle efficiencies. This is a good place to start, but it might be making an inefficient process just a little less inefficient, and miss an opportunity to look at a broader productivity. Either way, an immediate recommendation is to make the lifetime cost of fuel based on a reasonable forecast of fuel costs a key element in the decision to buy or lease vehicles. Companies rigorously managing their greenhouse gas footprint also should consider carbon dioxide emissions.

We also must avoid geographic myopia. Despite the recent rapid increases to about $3 per gallon, U.S. gasoline still remains among the cheapest in the industrialized world. Most of Europe pays well more than $6 per gallon. As a result, European operations might already be using cost-management practices that could be useful for the wider corporation. Alternatively, U.S. operations may underestimate the total impact of fuel costs by not appreciating other global market realities.

Reducing fuel costs and greenhouse gases inevitably will drive decisions to lighter weight vehicles and smaller engines, increasingly using either high-performance diesel or hybrid technology. Some rational combination of these variables should increase fuel efficiency on a per-mile basis by more than 30%, and an even higher percentage reduction in greenhouse gas emissions. In countries, such as Germany or Brazil, widely available and attractively priced biodiesel or bio-ethanol fuels also should be a factor in vehicle decisions.

Staying in the general territory of employee travel, few companies really understand the energy costs associated with rental cars. Relatively minor accounting and travel policy changes can make tracking and reducing these energy costs pretty much self-managing. The policy changes may restrict vehicle class, which broadly defines weight and efficiency, or, for example, require all rentals in Europe to be the widely available modern diesel vehicles, yielding substantially lower fuel costs and greenhouse gas emissions.

Jet fuel prices have increased 120% since 2001, and by 28% since 2005. Competition has limited airlines’ ability to pass these on, but they are inexorably finding their way into ticket prices. Another factor on the horizon is the growing pressure by the European Union and Japan to include aircraft greenhouse gas emissions in their regulatory regime. This will add new energy-related costs for airlines serving these markets. A company serious about managing energy costs and environmental impact will track and manage airline usage both in terms of cost and distance traveled. With modern accounting systems, this isn’t the onerous task it might once have been, and is a prerequisite for registering the company’s greenhouse gas emissions anyway.

A last factor to consider is the indirect costs of transportation energy. Many materials and services industry uses are transportation-intensive, and one of the many tasks of the company’s energy management team will be to rank them and begin working with suppliers to improve productivity. In May, we discussed managing indirect, or embedded, energy costs; transportation is just one example.

Remember that managing energy productivity is as much about managing future risk as managing current costs. Gasoline and diesel prices have the potential to increase substantially, and the full costs of carbon dioxide may be factored into car, truck and aircraft use. The company that anticipates these risks will both improve current productivity and be well placed to gain future competitive advantages.

Peter Garforth is principal of Garforth International LLC, Toledo, Ohio. He can be reached at [email protected].

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