Here We Go Again The Debate Over Fuel Price Hikes
In an industry report published in November 2007, Mark Thorsby, former executive director of the International Carwash Association, commented on the belief of some car wash operators that fuel price hikes were to blame for wash volume drops as high as 20 percent or 30 percent.
“Generally speaking, I don’t believe that gasoline prices have had a major impact on car wash volumes,” said Thorsby. “They have had some impact, but they are a convenient excuse and a whipping post for car wash operators who are experiencing declines.”
Unfortunately, turmoil in the Middle East and increasing demand for oil abroad is causing another round of fuel price hikes today.
With John Hofmeister, ex-president of Shell Oil, recently saying that we are looking at $5-a-gallon gas in 2012, the debate over fuel price hikes and their potential effect on car wash volumes may be on again.
At a Federal Highway Administration workshop in 2009, Daniel Brand with CRA International, an economic consulting firm, described what is generally known about how highway travel will change or be changed by sustained higher fuel costs based on the literature and national data.
According to Brand, the fuel price increases that occurred between 2007 and 2008 resulted in the largest monthly, year-over-year declines in U.S. vehicle miles traveled (VMT) since record keeping began in 1942. For the year 2008 through October, the decline was 3.5 percent or about 90 billion vehicle miles.
An important result of the VMT decline is that fuel consumption also is down. Energy Information Administration data for 2008 show that consumption declined by 3.3 percent, compared to 2007. This drop shows Americans are driving less, switching to transit, and buying more fuel-efficient cars.
In computing elasticities, Brand found a 30 percent increase in the price of gas led to a 3.5 percent decline in VMT and a 4.0 percent gas consumption decline. Brand noted the elasticities may be somewhat high because the early effect of the economic downturn was included in the data.
What these changes may mean to car wash operators can be discussed by examining the relationship between VMT and traffic counts. Transportation engineers define annual vehicle miles traveled as the average volume on a specific road segment multiplied by the length of the segment.
Therefore, if annual average daily traffic is 25,000, a 30 percent increase in price — $3.00 to $3.90 a gallon — would lead to a 3.5 percent decline in VMT or a traffic count of 24,125. Based on a capture rate of 0.7 percent, this would equate to a loss of 1,900 washes annually or 3,800 if the price would rise to about $5 a gallon.
Another implication of the impact of fuel price hikes on VMT and wash volumes is the hourly traffic variation.
Generally speaking, the hourly pattern of traffic varies throughout the day with weekday traffic exhibiting a.m./p.m. peak hours as motorists commute to and from work. The pattern also varies according to type of route (i.e., urban, suburban, local, and recreational).
In one example, a.m./p.m. peaks (7 a.m.-9 a.m./5 p.m.-7 p.m.) account for 47 percent of daily traffic, mid-morning/afternoon (10 a.m.-4 p.m.) account for 38 percent and evening/early morning (8 p.m.-6 a.m.) account for 15 percent.
According to benchmarks, car wash operators capture as much as 58 percent of their business between Monday and Friday with as much as 60 percent of this business occurring between 10 a.m. and 4 p.m.
Since it is difficult for motorists to reduce the use of their vehicles for work, the reduction in VMT from fuel price hikes would more likely occur during the weekday hours when many car wash operators capture a significant portion of business. Moreover, people in more rural, sparsely populated areas have fewer options for transit, trip chaining, and telecommuting.
There is also the income effect. For example, if a motorist drives the typical 12,000 miles a year at an average of 20 miles per gallon, fuel price hikes to $3.90 and $5.00 would result in additional cost of $540 and $1,200, annually.
Thus, we can claim an increase in the cost of driving is assumed to result in a decrease in the willingness to drive (and spend) resulting in a decrease in total VMT driven (and total spending) as individuals adjust their lives to maximize quality of life benefits within the constraints of their personal budget.
In next month’s column, the discussion will focus on strategies and tactics that car wash operators can use to
help counter the effects of fuel price hikes.