Fuel Surcharge And The Affect On Transportation And The Supply Chain


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Spring 2008 overview of Fuel Surcharge affects on the Trucking Industry

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Fuel Surcharge And The Affect On Transportation And The Supply Chain

  2. 2. Overview 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. Detailed Analysis 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. 2007 2008 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
  3. 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.” CONCLUSION 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.
  4. 4. 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. Reference: 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, https://www.ttnews.com/index.aspx