Fuel price volatility sparks concerns

Carriers say they are more worried about soaring fuel prices than about a possible fuel shortage this winter.

By -- Logistics Management, 10/1/2000

It's not going to be easy this winter, by all reports. The cost of fuel continues to head upward, and supplies of distillates are well below normal for this time of year, according to the U.S. Energy Information Administration (EIA).

U.S. stocks of heating-oil distillates (which are virtually the same as diesel distillates) are 35 percent lower than they were at this time last year, reports Jonathan Kagan, an EIA fuel specialist. Robert Costello, chief economist for the American Trucking Associations, thinks that might have a negative impact on the availability of diesel fuel, possibly prompting spot shortages. "If it's a cold winter, that'll be a huge whammy," he says. Costello believes government regulators could step in and divert diesel distillates to home-heating oil if supplies are tight. "The government," he says, "will not let people freeze in their homes."

The Clinton administration has already taken steps to prevent weather-related shortages. Just before press time, the president authorized the release of 30 million barrels of crude oil from the nation's 571-million-barrel Strategic Petroleum Reserve.

Shortly before that announcement, the Organization for Petroleum Exporting Countries (OPEC) had agreed to pump an additional 800,000 barrels of crude oil a day. But Costello says OPEC's decision won't put a significant dent in fuel prices anytime soon. The lower-cost extra crude will take months to get to the United States, he points out, and when it arrives, U.S. refiners will be hard pressed to find a place to store it. Refiners, he adds, are still working off stocks of the more expensive crude oil that's currently on the market.

Pain at the pump

The nation's carriers, of course, have been among the hardest hit by the fuel shortage. The current average price of $1.63 per gallon for on-highway diesel is "the highest price ever," the EIA's Kagan says, adding that there are no signs that any relief is in sight.

Costello predicts that small truck fleets will suffer the most. Eighty percent of U.S. motor carriers are companies with six or fewer trucks, he reports. They are likely to find themselves outmaneuvered in the fuel marketplace by large carriers that have the scale to purchase fuel at the best prices. "It's the independents [that] will probably be the first ones to fall," he warns.

The high cost of fuel, in fact, has led to job actions by independent drivers serving the ports of Savannah, Ga., and Los Angeles/Long Beach and Oakland, Calif. Owner-operators protesting the high cost of diesel and long wait times for loading and off-loading at ocean container terminals have parked their rigs and ignored calls from dispatchers.

As for the carriers themselves, record high fuel prices are leading motor carriers of all sizes to take steps to keep costs down. Yellow Freight spokesman Roger Dick says the LTL carrier has joined a fuel consortium with other large carriers and doesn't expect any shortages over the winter. Yellow, however, has imposed a fuel surcharge based on the U.S. National Fuel Index, he says. The surcharge moves half a percentage point with every 5-cent increase or decrease in diesel prices.

Con-Way Transportation spokesman Brian Millican says that although his company isn't particularly concerned about fuel availability either, it is worried about the cost of diesel. Con-Way is focusing intently on fuel economy, encouraging its drivers to conserve fuel and modifying truck engines to burn diesel more efficiently, he says. Con-Way, like most other motor carriers, has also implemented fuel surcharges.

Carriers in other modes of transportation also are fighting to control fuel costs. Nationwide, locomotive diesel averages more than $1.00 a gallon, compared with about 65 cents a gallon a year ago. John Bromley, a spokesman for the Union Pacific, the nation's largest railroad, says the railroad's recent 3-percent average rate hike was driven almost entirely by fuel-price concerns. "We've never had an increase of this scope," he says. UP had held off on a rate hike for some time, hoping that efficiencies it was implementing in its rail system could contain costs, Bromley says. But UP's locomotives consume about 1.3 billion gallons annually, and with the cost of fuel rising so sharply, the rate hike became unavoidable.

CSX Transportation, meanwhile, burns about 600 million gallons a year to run its locomotives, according to CEO John Snow. Snow calls the fuel-price increase "a big hit for us" and estimates that his company will pay about $265 million extra for fuel this year. The railroad announced late last month that it would implement a "fuel-cost recovery charge" of 4.0 percent, to be adjusted up or down depending on the market price of petroleum.

Aircargo operations also have been affected by the runup in diesel costs. The Air Transport Association estimates that fuel costs for U.S. airlines will be about 50 percent higher this year than last, with an estimated cost of $15.5 billion vs. $10.0 billion in 1999.

The high cost of diesel is likely to have far-reaching effects on the U.S. economy. (See "Viewpoint" on Page 13.) Both Costello and Kagan express concern about the price hike's potential to spark nationwide inflation. Says Kagan, "The runup in prices is going to add to any inflationary pressure."

Although price clearly will continue to be problematic, Kagan says that carriers need not lose sleep over the availability of fuel. "The product moves to where the money is," he says. "That's basic economics." UP's Bromley agrees, saying, "I suspect that if you've got the money, you'll get the fuel."