Shippers are in a good place with diesel but need to be ready to adjust quickly for changes

While diesel prices have largely been out of the spotlight in 2014, freight transportation and logistics stakeholders always need to keep a close eye on what prices are doing, as it has a significant impact on transportation budgets and forecasting.

Unlike other years, this year has seen prices hovering below the $4 mark for an extended period, with prices not at that level since the week of March 17, when the average price per gallon was $4.003 per gallon, according to data from the Department of Energy’s Energy Information Administration. That was the fourth and final week of the only stretch of the year in which prices were consistently above the $4 per gallon mark and have been below the $4 mark for the last 25 weeks (through the week of September 8).

While prices remain low, shippers still keep a close eye on 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 a key finding in the results of a Logistics Management reader survey of roughly 150 logistics, supply chain, and transportation executives.

According to the survey, 30 percent of respondents noted that average fuel surcharges were more than 20 percent above base rates, with 18 percent noting they were 16-20 percent higher. And 11.3 percent and 6.0 of shippers said they were in the 11-15 percent and 6-10 percent ranges, respectively, with 20.7 percent stating that their average fuel surcharges were 5 percent or less above base rates. Lastly, 8.0 percent said they were unsure of how much their average fuel surcharge was above base rates.

At press time, the current average price per gallon of diesel is $3.814 per gallon. This is in line with the EIA’s Short-Term Energy Outlook 2014 estimate of $3.86 per gallon and 2015’s $3.82 per gallon.

As for oil prices, which are currently in the low $90 range per barrel for WTI crude, the EIA’s Short-Term Energy Outlook is calling for prices to come in at $98.28 and $94.67, respectively, for 2014 and 2015. 

While prices are relatively in check at the moment, things can change quickly in a hurry, as was the case in 2008, when the average price per gallon of diesel was approaching $5 per gallon and oil barrel prices were pushing $150. And shippers are fully aware of triggers that could lead to higher prices, too, notably the myriad geopolitical issues such as the situation in Ukraine and Russia and ISIS in the Middle East, among others.

Should prices quickly do an about face from current levels and head up, shippers know situations, and budgets, can change in a hurry, and this was reflected in the survey’s data.

The LM survey found that 33.3 percent of shippers expect to pay higher surcharges in the coming months, and 55.3 percent said they are currently not expecting to pay higher fuel surcharges, with 11.3 percent unsure.

Not surprisingly, if prices were to head up, 71.5 percent of respondents noted they would raise or adjust their freight budgets to cover higher than expected fuel prices, with 28.5 percent saying they would not do the same.

As was the case in recent years, there was some variation as to how much shippers planned on adjusting budgets, with 50 percent planning to raise or adjust freight budgets by 5 percent or less and 32.1 percent planning on a 6-10 percent hike. And 9.4 percent of shippers said they planned to modify budgets by 11-15 percent, followed by 3.8 percent planning on a 16-20 percent adjustment. Rounding it out, 0.9 percent said they would adjust budgets by 21-50 percent and 3.8 percent said they would fully double budgets at 100 percent.

At last week’s FTR Annual Transportation Conference in Indianapolis, Noel Perry, FTR Senior Consultant, said that since mid-to-early 2011 diesel prices over all, has not largely changed.

“As you are plugging in your assumptions about fuel for the rest of 2014 and into 2015, there is overwhelming evidence suggesting it is best to keep those assumptions where they are today,” he said. “But you need to recognize each month there is a 2-to-5 percent variation, which makes for a nice and easy planning scenario with respect to fuel surcharges and respect to fuel costs. The easiest thing to do is plug in what you had last year.”

Even with prices currently working in shippers’ favor, 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 head up again, 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 supply chain consultant Brittain Ladd said said is key as transportation costs become more important relative to production, inventory and facility fixed costs.

With that as the backdrop, Ladd said his recommended strategy for shippers is to “identify opportunities to increase the number of distribution centers to minimize distance travelled for outbound transportation and to make operational changes to trade down to lower cost transportation such as air to ground and trucking to rail. The challenge of course is that lead times and replenishment to meet customer demand must be analyzed and processes updates to adjust to the new transportation reality.”