Carriers, shippers share roller coaster diesel fuel ride
John D. Schulz, Contributing Editor -- Logistics Management, 3/1/2009
Washington — So, you think you're smart? You tabbed the Pittsburgh Steelers to win the Super Bowl a year ago, predicted the Obama landslide in the presidential election, and can accurately forecast the weather 10 days in advance.
Now try your hand at this: See if you can predict what diesel fuel (or crude oil, its major raw material) will cost six months from now? Give up? So have many trucking executives.
"It's a total crapshoot," says David Congdon, president and CEO of Old Dominion Freight Line (ODFL), a major regional and interregional LTL carrier. "We estimate the best we can. You can try to forecast all you want, but we never would have dreamed fuel would have gone as high as it did last year or as low as it has this year."
Diesel fuel costs have whipsawed the industry and caused trucking CEOs and their accountants to fume over their mostly futile projections for both the near- and long-term. After all, who really knows when the next big international crisis might cause another $50 per-barrel spike in diesel fuel? Or when the U.S. dollar might fall precipitously and prices rise again?
Consider these facts: Last year, the American Trucking Associations (ATA) estimated the trucking industry paid more than $150 billion on diesel, up from $112 billion in 2007. Truckers consume about 55 billion gallons of fuel—diesel and gasoline—annually.
Last year diesel fuel peaked at $4.764 per gallon on July 14. That was 69 percent higher than the corresponding week from 2007.
From there, it has since fallen to its lowest level since 2005, hitting a low of $1.838 per gallon on Jan. 26. In mid-February, the cost averaged $2.186, less than half its peak just eight months ago.
Such peaks and valleys have affected motor carriers' bottom lines and shippers' rates. Werner Enterprises, the nation's fourth-largest truckload carrier, calculated that the total negative impact on its operating income due to fuel cost increases, net of fuel surcharges, was $61 million from 2004 to 2007.
Other carriers report similar figures, although they can be mitigated by collection of fuel surcharges.
"Fuel surcharges were never meant as a profit. It was designed as a pure pass-through mechanism," says ODFL's Congdon. "But our industry would not have survived the past few years without fuel surcharges."
For the record, the U.S. Energy Information Agency is predicting diesel fuel prices around $2.50 for the remainder of the year. But the Department of Energy's forecasts have been wildly inaccurate in the past and many trucking executives take them with a grain of salt. Bob Costello, ATA's chief economist, is talking about prices in the $2.25 range for the rest of the year.
"In the short term, I'm not very confident about those forecasts; but in the long-term I am very confident I'm right. Fuel prices will rise at a rate higher than inflation," says Douglas Duncan, president and CEO of FedEx Freight. "Long-term trends can be understood, and it's important we look at it that way."
Much will depend on world oil prices. They have gone from $33.78 a barrel on Jan. 5, 2004, to $147.27 last July 11 and then back down to a low of $32.40 last Dec. 19. That means crude had a $100-a-barrel plunge in less than four months.
Who's to say that it can't rise by the same amount just as quickly?
Much depends on world supply and demand. The International Energy Administration (IEA) recently forecast that global demand for oil would drop 1.2 percent this year, its biggest drop in 27 years.
U.S. demand is forecast to drop 2.9 percent from 2008 levels, which were 5 percent lower than 2007. The recession, more fuel-efficient cars, and more efficiency are the major reasons, IEA said.
Most oil experts say today's supply/demand charts make a "normal" price for oil to be between $50 and $60 a barrel, which translate into fuel costing about $3 a gallon.
But there are lots of assumptions in that $50 to $60 forecast that may not materialize. Middle East tensions could escalate. Some countries could nationalize their oil companies. Some proven oil reserves could disappoint.
"These things are controlled by monopolies such as OPEC," Duncan added. "The one certainty is the price of fuel will escalate higher than inflation over time. That's our planning. It's important we look at it that way. This nation can't lose sight of development of hybrid vehicles and alternative energy forms. They're as important as ever. We can't be shortsighted."
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