The two main driving forces behind the logistics industry are people and fuel. No matter the transportation mode (road, rail, air, etc.), freight remains stationary without capable hands at the wheel and fuel in the tank. Unfortunately, fuel costs are one of the most volatile aspects in the shipping industry; prices change overnight – sometimes drastically – and that changes the game for everyone involved.
According to Transportation Economics and Management Systems Inc. (TEMS), fuel price fluctuations have an overall larger impact on the trucking industry vs. rail or water transportation. Whether the pricing for crude oil lands at $145 per barrel (as it was in the summer of 2008) or at $29 per barrel (as it was in February 2016), the transportation industry must adjust accordingly.
Most carriers calculate their fuel surcharges based on fuel prices from the previous week. This delay in pricing adjustment allows freight companies to react quickly to pricing changes. However, rail companies tend toward longer lags in pricing adjustment and thus are not as responsive to fuel price changes.
As the cost of fuel increases, all players in the manufacturing and transportation industries are affected. Not only do consumers pay more at the pump, they also end up paying more at the store. In order to maintain profit margins, carriers adjust prices according to new fuel costs. When fuel prices go up, so do carrier mileage charges. These changes in overall charges trickle down to consumers in the form of higher prices on goods. A 2008 report prepared by TEMS stated that price increases across the board correlate with declines in both consumption and economic growth.
Although trucking is heavily affected by changes in fuel costs, it’s not the only transportation sector that feels the effects. According to TEMS, when fuel prices increase, many trucking companies and freight brokers supplement long-distance hauls with intermodal transport due to intermodal being a more economical shipping method. The TEMS report claims this increase in rail usage reduces rail capacity, increasing shipping and drayage costs for this method.
Though the majority of transport companies use short pricing adjustment gaps, those utilizing longer lags benefit greatly from big drops in fuel prices, according to PricewaterhouseCoopers’ strategy+business magazine. Luckily, higher profit margins for carriers and shippers trickle down to the consumer through reductions in the prices of consumer goods.
Low fuel prices can be a catch-22 for the rail industry. Short-term effects of low fuel prices increase the profit margin for railroad transportation. However, when fuel prices are low, shippers are more likely to utilize trucks for their transportation needs, as trucks can transport goods faster than rail. In this scenario, rail capacity increases as usage declines.
As fuel prices continue to stay at historic lows, effects on transportation and freight shipping costs tend to benefit the consumer. It’s easy to forget how much small pricing changes affect the overall consumer industry. In a constantly moving industry, you can expect profit margins and consumer costs to hinge closely on changing fuel prices.