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Rising Fuel Prices Raise Concerns for US Distribution

May 10, 2022

*Please note that fuel prices fluctuate frequently. The information below is accurate as of May 9, 2022.

Fuel prices set all-time highs in March in the US. Regular gasoline was last selling for $4.328 a gallon on a national average basis which was down only a partial cent from its all-time high set on March 11, 2022 of $4.331.

While the general consumer is feeling the price hikes at the pump, diesel prices have a greater impact on US distribution systems and supply chain integrity than gasoline. Diesel retail prices are currently at an all-time high of $5.54 a gallon as of May 9, 2022.

Diesel Prices

The price of crude oil accounts for 53% of the total price per gallon for diesel. When crude oil prices continue to hover near $100 a barrel, diesel prices are higher simply as a product of input prices. There is also a challenge with global availability of diesel. The US is now supplying Europe and other markets that previously relied on Ukraine or Russia for diesel resources. In January and February, the US was exporting approximately 18,000 barrels per day out of the Gulf region to Europe. By March, that figure had surged to exporting 103,000 barrels per day in an attempt to keep diesel shortages controlled in countries like Austria and Germany.

One offset to the global oil is the recent increase of COVID lockdowns in China and the resulting decrease in the demand for petroleum products. Extreme lockdowns in Shanghai, Guangzhou, Hong Kong, and other regions have affected approximately 153 million people with an impact of 20% to China’s GDP. Additionally, estimates suggest that if US workers were back in the office and the COVID situation in China had not resurged, diesel prices would be well above the current all-time highs and oil could be close to $150 a barrel.

Distribution Impact

For US distribution networks, the surge in crude oil prices combined with global supply issues creates major challenges. When diesel prices hit the highs seen today, supply chain managers often review transportation mode choices in an attempt to manage financial impacts. The rail sector tends to benefit the most when fuel surcharges are high. Shippers try to avoid higher rates (which are currently 62% higher than a year ago), and rail provides them with that safe haven. The disadvantage is the need to adjust transit expectations to accommodate a slightly slower delivery time, but rail is the most economical means of moving freight in today’s economy.

Less-than-truckload (LTL) carriers are experiencing slightly less of an impact as well. When shippers purchase space on an LTL truck, they are purchasing just a portion of a truck and fuel surcharges are typically split between multiple shipments. Despite the freight cost being slightly higher than other truckload modes, the allocation of the fuel surcharge usually makes it a less expensive choice than other modes of trucking.

Truckload carriers tend to suffer the most when diesel prices soar. Fuel surcharges may not be enough to cover their operating expenses which are also rising. It now costs 75% more to fuel a truck than just over a year ago, therefore truckload carriers need far more operating cash than in prior markets. With 90% of the truckload industry being comprised of single operators, and the most firms having less than 45 trucks, carriers often do not have the cash reserves needed to maintain profitability.

In 2008, when the price of diesel was again at all-time highs, the truckload sector lost 4,000 firms. Since the start of the pandemic, the industry has rebounded and added 68,000 trucking firms to support the demand of the global supply chain. Unfortunately, given slightly softening demand from inflation and much higher operating costs, it will be challenging for those firms to survive unless oil prices are quickly brought under control.

Managing Risks

For distribution networks, the surge in oil prices will once again tighten capacity headed into the summer peak shipping season and will likely result in continued price increases. With higher cash requirements and increased costs, supply chain managers should also be aware of the increased risk for shipments to be “stranded” due to a potential increase in failing businesses. Not only will goods be left on trucks, docks, and warehouses, but shippers will be caught in the time it takes for a bankruptcy court to process the closing, award debtors, and release freight-in-transit.

Supply chain managers need to continue to be diligent and ensure the viability of their carrier partners. If you are using a brokerage to help secure capacity, ensure the broker has a reliable carrier base and has processes in place to mitigate delays. A reliable broker will also have strict financial requirements for carriers and should be careful when using start-up businesses. Ensure the integrity of your distribution network by confirming shippers have appropriate systems to insulate you during what appears to be a continued volatile period in global distribution and supply chains.

MarksNelson is keeping up-to-date on the challenges facing the distribution industry and formulating the latest strategies to help businesses move forward. Reach out to us today to learn more about how we can help.

About THE AUTHOR

Shari has deep experience in financial reporting of income taxes and works closely with our business clients, their owners, and key executives to minimize risks in business income tax reporting and compliance. She is skilled at supporting clients with corporate income tax planning and consulting... >>> READ MORE

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