LM reader study shows shippers are prepping for continued increases in fuel prices

At one point earlier this year, it was easy to see that the average price per gallon on a weekly basis was more or less in free fall mode.

According to the Department of Energy’s Energy Information Administration (EIA), the week of February 23 marked the first time in 15 weeks that the weekly average saw a gain, with a mere 0.3 cent increase to $1.983 per gallon.

While a 0.3 cent gain may not really register in terms of a major increase, since that time diesel prices have mainly heading in one direction: higher. What’s more, diesel prices have cumulatively risen more than 40 cents since that time, too, with prices in the low $2.40 per gallon range at press time.  This is in range with the current 2016 average in the EIA’s Short-Term Energy Outlook, which is at $2.34, with the 2017 average estimate currently pegged at $2.69 per gallon.

But while prices have increased, EIA data points out that these weekly prices, when compared to a year ago, have typically been down in the neighborhood of 40-to-50 cents annually.  Even with these types of annual spreads, though, it is safe to say shippers are fully cognizant of these increases and the impact they can have on the bottom line, budgeting, and forecasting, too.

Shippers are vigilant in keeping a watchful eye on fuel prices, because in most modes they are paying a fairly high percentage-in terms of their average fuel surcharge-above standard base rates. That was made clear in the findings of a Logistics Management readership study of more than 200 buyers of freight transportation and logistics services.

According to the survey, 5.5 % of respondents noted that average fuel surcharges were more than 20% above base rates, with 11.4% noting they were 16-20% higher. And 17.9% and 24.9% of shippers said they were in the 11-15% and 6-10% ranges, respectively, with 28.4% stating that their average fuel surcharges were 5% or less above base rates. 11.9% said they were unsure of how much their average fuel surcharge was above base rates.

The recent weekly increases in diesel prices appeared to influence respondents’ future views in terms of the possibility of having to pay higher fuel surcharges, with 59.3% saying they expected to pay higher fuel surcharges to carriers in the coming months, with 25.6% saying they don’t expect to pay higher fuel surcharges, and 15.1% saying they were unsure.

And perhaps even more telling was that there was nearly a 60-40 split of respondents indicating that if fuel prices continue to rise they will raise or adjust freight budgets to cover higher than budgeted fuel prices, with 59.6% saying they will do so and 40.4% indicating they will not. 

And of the 59.6% saying that will raise or adjust freight budgets, 46.6 percent said they would raise it by 1-5%, with another 42.2% saying it would be changed upward by 6-10 percent. Another 6% of respondents said they would raise it by 11-15 percent with 3.4% saying it would rise 16-20 percent. Less than 2% of respondents said it would need to be even higher with 0.9 percent pegging it at 21-50% and another 0.9% at a full 100%.

A housing products shipper told LM that rising fuel costs have had an impact on the bottom line to a degree.

“We did have to budget for the increased cost of moving off of intermodal onto truckload, which cost us more than $1 million per year including the increased costs of fuel to do that,” he said. “Our average fuel surcharge per mile has increased from $0.13 per mile early in the first quarter to $0.21 now so it has had an impact on our cost. We anticipate it to continue at this level or slightly higher for the rest of the year and have adjusted our budget accordingly.”

Echo Global Logistics CEO Doug Waggoner said that fuel surcharge tables have been engineered to really cover the impact of either rising or falling costs.

“As a 3PL and broker, we certainly do that,” he said. “We don’t make money on fuel so what we charge is what we pass on to the customer. A lot of it can impact the top line and mathematically it can impact our margins while not really affecting profitability. As a third party buys purchased transportation and then sells it that spread is our gross profit and that percentage of the gross profit and a percentage of total revenue, which is our gross margin. So when fuel comes down, it is part of the denominator though it makes our margin go up.”

Shippers told LM they are continually working with carrier partners on ways to better control fuel cost pressures whenever possible to get freight budgets better aligned going forward. Regardless of the fluctuation in diesel prices, shippers are cognizant of the impact diesel prices can have on their bottom line—for better or worse.

Should prices continue to rise, the primary strategy for shippers to combat raising fuel costs is to conduct supply chain network optimization to model the impact of rising diesel fuel and transportation costs, which stakeholders say is key as transportation costs become more important relative to production, inventory and facility fixed costs.