Oil and diesel fuel situation has logistics managers focused on adjusting budgets to cover costs

Even with oil prices and the price per gallon of diesel fuel mildly moderating in recent weeks, the days of $4 per gallon diesel and $100 per barrel appear to be the norm once again. And while the current situation may not be as dire as it was during the summer of 2008, when prices hit nearly $5 per gallon and $150 per barrel, shippers are bracing for prolonged pain at the pump, according to the results of a recent Logistics Management reader survey of roughly 250 logistics, supply chain, and transportation executives.

The survey revealed that 25 percent felt average fuel surcharges were more than 20 percent above base rates and another 19 percent say average fuel surcharges were 11-15 percent above base rates. 18 percent said average fuel surcharges were in the 16-20 percent range above base rates, with 16 percent of respondents at 6-10 percent and 13 percent saying average fuel surcharges were 1-5 percent above base rates. Another 8 percent said they were unsure of how much their average fuel surcharge was above base rates.

With diesel in the $4 per gallon range on a consistent basis going back to early March, according to data from the Department of Energy’s Energy Information Administration, the LM survey’s results found it is forcing shippers to increase their transportation budgets to varying degrees to cover fuel costs.

39 percent plan to increase their budgets by 6-10 percent, and 34 percent are looking at a 1-5 percent hike. Another 15 percent indicated budgets will rise 11-15 percent, with 8 percent pointing to a 16-20 percent gain, and 2 percent discussing a 21-50 percent mark-up.

Even through shippers want to adjust budgets in order to offset the increased costs higher fuel prices bring, it is not always an easy thing to manage.

“In 2008 when fuel prices went up, they then shot right back down,” said Eric Morley, Director of Transportation Operations at Best Buy. “It was such a small blip that by the time anybody really reacted to do anything different, it was over. The current rise in fuel costs is slower and more sustained, and everybody is looking at it a little bit differently.”

With fuel prices, for the most part seeing steady gains, the focus from a supply chain management perspective, explained Morley, is more on utilization and efficiency by doing things like driving empty miles out of transportation networks.

Managing supply chain efficiency in light of higher energy prices is not something that ever truly goes out of style, and based on the EIA’s Short-Term Energy Outlook that is unlikely to change any time soon.

According to the EIA, the average price per barrel for oil will be $102.67 in 2011 and increase 4.2 percent in 2012 to $107.00. As for diesel, the EIA stated the average price per gallon in 2011 of $3.89 will increase 0.8 percent to $3.93 in 2012.

As fuel certainly has the potential to negatively impact shippers’ budgets, there is clearly concern for carriers, too, even though than can pass along the increased costs in the form of higher fuel surcharges.

Derek Leathers, President and Chief Operating Officer of Werner Enterprises, told LM that compared to 2008’s run-up, what is happening now is more in front of carriers than it was back then.

“The underlying supply is still there,” said Leathers. “You look at reserves here in the U.S, and there does not seem to be a supply-related reason for fuel to be as expensive as it is today. Given that, prices never seem to go down during the summer driving season so we are not looking for any relief in the summer. But I do feel as though it is currently probably at a fairly high mark relative to the underlying supply and demand. We are going to prepare for the potential for worse and continue to work to use less of it. We cannot control the price, but we can control how much we burn.”

Mike Regan CEO and Chairman of the Board, TranzAct Technologies, explained that with the rapid rise in the price of diesel, and the reality that carriers are asking for and getting higher rates, many shippers are finding that there are some “unfavorable variances” in their transportation budgets.

“Shippers who budgeted for a 3 percent-to-5percent increase in transportation costs are discovering that their transportation budgets are off,” said Regan. “That is why we are strongly recommending that shippers review and revise their transportation budgets to reflect increases of as much as 10 percent-to-12 percent. “We realize that those are big numbers, but when you look at the increase in the price of diesel and the carrier rate increases that are occurring, it’s obvious that for most shippers, 3 percent-to-5 percent increases are unrealistic.”