Happy New Year everyone and welcome to FuelCred’s motor fuel cost outlook for 2020. In this post we’ll provide you with fuel cost projections for 2020 directly from the U.S. Energy Information Administration (the government entity in charge of monitoring energy consumption and prices), as well as our commentary, and a layman’s explanation of what it all means.
The official projection
If you prefer the abridged version, we won’t keep you waiting. Good News: The retail price per gallon of gasoline for 2020, on average in the U.S., is forecast to remain about the same as last year increasing from $2.60/gallon in 2019 to $2.63/gallon in 2020.
The retail price per gallon of diesel for 2020, on average in the U.S., is forecast to increase a bit more vs. last year increasing from $3.06/gallon in 2019 to $3.11/gallon in 2020. That said, this is still lower than its 2018 price of $3.19/gallon. The primary reason for the difference in the outlook vs. gasoline are the new ultra-low sulfur diesel regulations (IMO 2020).
An explanation and some commentary
Fuel prices are actually quite difficult to project very accurately for a few reasons. The most important reason is that about 60%+ of the price of a gallon of fuel depends on the underlying price of oil. The price of oil should nominally only depend on supply (the amount of oil being pumped from the ground) and demand (the amount of fuel the world is consuming). But it’s not that simple.
The first wildcard is OPEC. The Organization of the Petroleum Exporting Countries, led by de-fact leader Saudi Arabia, is a group of 14 countries who collude to control the worldwide supply of oil. The OPEC countries, who account for 44% of the world’s oil production, seek to maintain oil prices at a rate that is favorable to its members.
The second wildcard is the “unknown” of geopolitical events and circumstances. For example, at the time of this writing, the world is struggling to contain the coronavirus. To reduce the rate of infection, transportation has been restricted in large swaths of the world, and thus the current demand for oil has already been reduced by a whopping 10%. The price of oil has reacted accordingly.
But doesn’t the U.S. have its own oil supply?
Yes! In 2018 the United States became the largest individual producer of oil in the world- which is a story in itself. So why don’t we control oil prices? Well our oil production is still <20% of the worldwide demand (recall the OPEC cartel own 40%+). And OPEC, in response to increased production by other countries, decreases oil production by its member states, to maintain a level supply, and thus maintain oil prices at the rate most favorable to its members.
Death and Taxes
As you can see from the graphic above, the second largest contributor (about 20%) to the price of fuel is, you guessed it, taxes.
Since 1932 the federal government has imposed a “temporary” tax on the cost of fuel (subsequently made permanent in 1941). Currently, the federal government charges a tax of 18.4 cents on every gallon of gasoline and 24.4 cents on every gallon of diesel. This tax rate has remained steady over the past decade. That said, many states have imposed even higher fuel tax rates, and these tax rates, unfortunately, seem to creep higher and higher, year-over-year, contributing to our higher fuel prices.
That said, landscapers who use fuel for off-road purposes (such as in a lawnmower) can receive a 100% refund of fuel taxes paid which can reduce fuel cost by up to 20%. Our app, FuelCred, is the only app on the market that monitors, analyzes, and keeps track of fuel purchases made with your business credit card, calculates your fuel tax refund, and produces the proper form to legally request your refund from the IRS.
So what does it all mean
For 2020, for better or for worse, expect fuel prices to remain about the same or possibly decrease. We don’t know how long travel will be restricted in an effort to control the coronavirus, but this has already had an effect. Additionally, many economists think the U.S. is due for an economic “correction” of some sort- since 2009 we’ve enjoyed the longest U.S. economic expansion in the history of the country. Hopefully we can keep it going for another year… but you never know.
