Filed Under:Risk Management, Corporate Risk

The Consequences of Spiking Oil

When the price of oil spikes as it has in recent months (and potentially more after Tropical Storm Don), many start to look at the correlation between these costs and vehicle miles traveled (VMT), and the effect on claims frequency. With the world oil demand expected to continue growing while the supply from countries that are not OPEC members likely slowing, the oil market will tighten further through 2012.

In auto physical damage claims, we need to look beyond this direct impact and focus our attention on some less obvious areas that will be influenced.

For example, since paint and solvents are made in large part from petroleum, these prices will increase. Looking back at the last time oil spiked to current levels, we experienced a four percent increase for 2009 in the hourly reimbursement rates nationally. There was a lag, however, of approximately four months between the time oil hit its highest rate and the rise in paint and materials. 

Related: More Blog Posts from Sounding the Horn

Using this as a guide, we should start to see increases in the cost of paint and materials around late summer.  These pricing pressures will trickle their way through the collision repair system, with the impact surfacing in the late third or early fourth quarter.

Parts will also see an increase, but again, via a less direct route. When oil prices reach the steep rate at which they are now, it also squeezes profit margins for parts wholesalers.  Delivery charges for parts of all types added to the cost of obtaining collision parts may be in the near future.   

So it seems some collision repair costs will be on the rise if oil and gas prices keep heading up, but claims frequency should decline (unlike when gas prices drop). But will frequency decline as much as we saw during the previous spike? 

It likely won’t be as severe of a reduction in VMT because the fleet of cars on U.S. roads is more fuel efficient than it was a mere three years ago, and the employment picture has improved marginally. Those two factors may translate to a more modest reduction in VMT.  

Statements and opinions expressed in this blog are solely those of the author.  They are not offered as and do not constitute legal advice or opinion of Mitchell International, Inc.

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