Fuel Surcharge And The Affect On Transportation And The Supply Chain
DIESEL FUEL PRICING AND THE EFFECT ON
As a result of recent strong economic growth world-wide, transitory shortages of
experienced personnel, equipment, and construction materials in the oil industry and
political instability in some major producing regions, oil prices currently are above EIA’s
estimate of the long-run equilibrium price. EIA’s expectations regarding the ultimate size
of both conventional and unconventional liquid resources have not changed since last
year’s Annual Energy Outlook. Forecasting experts generally agree that OPEC will
continue to maintain their 40% market share thru the year 2030. The impact of non-
OPEC countries including Brazil, Azerbaijan, and Kazakhstan—with higher oil prices
allowing expanded infrastructure, and new exploration and drilling technologies permit
additional non-OPEC oil production to offset short term price increases and new nominal
prices are expected to drop to 2006 prices of $70 per barrel ($113 per barrel nominal) by
2016. Also, with the economic viability of Canada’s oil sands enhanced by higher world
oil prices and advances in production technology, oil sands production is expected to
reach 4 million barrels per day in 2030. Short-term speculation has become completely
disjointed from actual real demand and while its influence is significant, it is impossible
at this point to analyze a statistically significant trend forecasting model.
The effects of the catalysts above have had a significant impact on short term prices of
fuel oil prices. 1st Quarter 2004 Diesel Fuel prices have increased 165% by the end of the
1st Quarter 2008. The graph below shows the most current 5 Quarters.
Q1 Q2 Q3 Q4 Q1
184 212 224 257 283
While the quarterly increases have been significant, the dramatic increase of Diesel Fuel
during the current year can be seen in the weekly chart below.
Jan 01/07 337.6 01/14 332.6 01/21 327.0 01/28 325.9
Feb 02/04 328.0 02/11 328.0 02/18 339.6 02/25 355.2
Mar 03/03 365.8 03/10 381.9 03/17 397.4 03/24 398.9 03/31 396.4
Apr 04/07 395.5 04/14 405.9 04/21 414.3 04/28 417.7
May 05/05 414.9 05/12 433.1 05/19 449.7 05/26 472.3
The trucking industry spent over $112 billion on fuel in 2007, and it is on pace to spend
$141.5 billion in 2008 – a record high. That’s up from $106 billion in 2006. In 2007, the
industry’s diesel expenditures were about equal to the entire New Zealand economy.
Additionally, at $112.6 billion, the industry’s diesel fuel bill was 9 % larger than the
entire Kuwaiti economy, the 6th largest oil exporter in the world. Rising fuel costs are
having a huge impact on the trucking industry. For many motor carriers, fuel is now
equal to labor as the highest expense; and for some carriers, fuel has surpassed labor as
their largest expense. This is especially true for small companies and owner operators.
The average over the road truck driver is spending $2600 per week just to fuel their
vehicles. The trucking industry is extremely competitive industry comprised largely of
small businesses. Roughly 96% of all interstate motor carriers operate 20 or fewer
trucks. Each year, the trucking industry consumes over 39 billion gallons of diesel fuel.
This means that a one-cent increase in the average price of diesel costs the trucking
industry an additional $391 million in fuel expenses annually. Because of this, Shippers
can expect hefty rate increases from truckload carriers, possibly as early as next quarter,
because shrinking capacity is bringing supply more in line with demand. Top executives
from Swift Transportation, U.S. Xpress Enterprises, CRST International and Covenant
Transportation Group each delivered that message last week at the Wolfe Research
Transportation Conference in New York. Increases will range upward from 3%,
excluding fuel surcharges, and possibly reaching 10%.
Less than Truck load carriers are affected by the costs as well. Current discounted FSC’s
(Fuel Surcharges) written into current contracts will expire and not be negotiated to the
shippers advantage. An interesting quote from Covenant Transportation’s CEO David
Parker sums up the feelings held by most Transportation Executives, “There isn’t a
carrier in the U.S. who feels that the shippers aren’t taking advantage of us now,” Parker
said. “There are damaged relationships. When the ball is in our court, are we going to put
the screws to them? My inclination is to say yes.”
A total of 935 carriers filed Bankruptcy in the first quarter of 2008, the highest number
sense the 2001 recession. Several carriers are currently in financial difficulty including
YRC, and SIAI (it’s Jevic Transportation division closed it’s doors last week after 27
years of doing business and doing $350 million in revenue in 2007). News releases from
other carriers like FedEx indicate that the dynamic fuel surcharges in place are not
keeping up with the price of the fuel increases and that an adjustment is pending.
What this all means to Shippers generally and ETS specifically is that we can now
conservatively estimate a minimum of a 3% increase in our transportation expenses for
the 2008/2009 fiscal year, not including the fuel surcharge. Our focus should be on
maintaining our current negotiated base rates and allow the fuel surcharge to float as we
now have it. We may have some further leverage with our carriers, especially if we
attempt to bundle the New Sunshine LLC’s total transportation spend. Market share is
becoming less important than sustained profitability and one possible way to avoid
increased transportation costs for the separate companies is to look at the entire New
Sunshine LLC spend.
Another factor, on the small package side, is the current reorganization at DHL that
involves UPS and the USPS. DHL has aggressively priced its business in the past and
has nearly made it untouchable for UPS or FedEx to compete against. This may very
quickly disappear and cause small package rates to increase at the same levels as those on
the freight side. Further analysis of the proposed reorganization must be completed to
determine its affect.
David Barry, Vice President, Swift Transportation. Congressional Testimony before the
U.S. House of Representatives, April 24, 2008.
Tim Lynch, Executive Director, American Truckers Association, May 22, 2008.
Testimony at a meeting with members of Congress and the Consumer Energy Alliance at
Cannon House Office Building.
Energy Information Agency (EIA), http://www.eia.doe.gov/
Transport Topics Online, May 26, 2008 and the June 1, 2008,