Current oil and gas situation may have a mixed impact for shippers' transportation budgets, LM survey indicates

Jeff Berman, Senior Editor -- Logistics Management, 1/23/2008

WALTHAM. Mass.—With the price of oil occasionally exceeding the $100 per barrel mark this winter and diesel gas consistently above the $3 per gallon mark since September, shippers have somewhat mixed feelings when it comes to gauging how the current situation is going to ultimately effect their 2008 transportation budgets, according to the findings of a recent Logistics Management reader survey.

An example of this is how today’s prices are influencing how much shippers’ average fuel surcharges are currently above their base rates, according to the 213 logistics, supply chain, and transportation managers that responded to the LM survey. In this instance, the survey found that 33 percent of respondents said their average fuel surcharges are 21 percent or more above their base rates, followed by 21 percent at 16-20 percent, and 15 percent at 6-10 percent and 11-15 percent, respectively.

Taking this a step further, more than a combined 50 percent of respondents said they planned to raise their transportation budgets to cover rising fuel costs by up to ten percent this year, with 27 percent saying they would raise rates from 0-5 percent and 24 percent indicating their budgets would increase by 6-10 percent.

With this type of potential increase in transportation budgets looming, the actual financial pinch may not be quite as bad as anticipated, though, according to James Haughey, chief economist for Reed Construction Data.

“With a good amount of shippers raising their freight budget 6-7 percent to cover higher than budgeted fuel prices, their total cost increase will be in the neighborhood of one percent, which is unpleasant but manageable,” said Haughey.

But making matters worse is the fact that because of the economics driving the increases in global oil prices, the threshold for fuel surcharges shippers have to pay is non-existent, according to Dustin Smith, North American transportation manager for International Paint LLC in Houston. 

“Shippers will have to pay to get their goods to the market even as the price of fuel increases,” said Smith. “There are several ways shippers can help to reduce the added cost of fuel surcharged imposed by [carriers]. Firstly, the fuel surcharge (FSC) is not necessarily an evil thing. Shippers need to make partnerships with the transportation and logistics services companies and realize that without an FSC these companies would not likely be able to stay in business….but shippers need to do their homework to determine what the actual costs are and what percent they should pay to carriers.”

Looking to the future, survey respondents were almost evenly split on whether or not they would be forced to alter their shipping strategies if gas and oil prices continue to spike in the coming months: 47 percent said they would change things up, and 53 percent said they would not.

But one factor that may come into play in terms of the fuel pricing situation is the current state of the U.S. economy, with reports of a possible recession popping up on a daily basis. It is clear these reports are far more than speculation, with the White House kicking the tires on a $150 billion economic stimulus plan comprised of tax cuts for businesses and rebates for individual taxpayers.

“We should see some price relief as the ‘R’—recession—word gets tossed around,” said Tom Kloza, publisher and chief oil analyst of Oil Price Information Service, a petroleum pricing and news information service in Rockville, Md. “And if the rhetoric leads to actual economic stagnation, we’ll see more than just a temporary price relief on diesel.”

But Kloza warned that the U.S. accounts for only one out of four or five gallons of gasoline sold globally and it does not account for nearly as much diesel. And because of this, he explained that the only way in which a real slowdown would occur is if other countries—particularly developing ones—saw an economic downturn.