Jason Smith, CEO of Shaker Logistics, recently spoke with the Albany Business Review about the rising cost of diesel fuel and how this is impacting shippers. Here’s a deeper dive into the global conflict that’s creating increased fuel prices, the impact it has on truck capacity, and how shippers can weather the storm.
Read the full interview on the Albany Business Review website.
The War That Hit the Fuel Pump
As the war with Iran enters its fourth month, the status of the Strait of Hormuz continues to impact the global economy with ripple effects on international and domestic freight markets. Ocean tankers attempting to sail through the Strait are attacked, seized, or turned away as warring parties struggle for control of the Strait.
Fuel prices have shot up for consumers and the trucking industry – more than 20% of the world’s oil and gas supply travels through the Strait. Without freedom of movement through this critical channel, the oil supply quickly constrained. This major supply chain disruption has caused the “biggest energy security threat in history,” according to the head of the International Energy Agency in an interview with CNBC.
In the U.S., this disruption is manifesting as a nearly 50% increase in diesel fuel prices, putting pressure on trucking companies, shippers, and ultimately, consumers.
How Soaring Fuel Prices Impact Trucking Capacity
“Our fleet buys 55,000 to 60,000 gallons of fuel a month. We are paying two dollars a gallon more than we did a few weeks ago,” Jason Smith said in an April interview with the Albany Business Review.
A month later in May, diesel prices haven’t gone down in any meaningful way, with drivers paying around $5.50 to over $6.00 per gallon at the pump. As the federal government mulls mitigation tactics like temporary suspension of the federal gas tax (24.4 cents per gallon per diesel), shippers are facing prices that still average $1 or more higher than they were in early March – even with a potential tax pause.
Increased fuel costs are hitting fleets right in the operating budget.
Most trucking and logistics companies price shipments based on a line haul rate plus any extras, like accessorials. Fuel surcharges are also a standard industry practice that allow large and midsize carriers to manage cost volatility so they can continue to deliver capacity. Fuel surcharges are indexed to a federal database of fuel prices published by the EPA, and the surcharge amount is automatically adjusted with the cost of diesel fuel. Most shippers and their logistics partners agree on contracted lane rates and fuel surcharge practices as part of their overall service agreement.
“We’re not making any more money,” said Jason, “just covering the cost of our fuel.”
This allows fleets to keep trucks, and critical freight, moving steadily.
But smaller carriers aren’t so lucky. Many small carriers (operations with ten or fewer trucks) move loads on the spot market for “all-in” rates without breaking out fuel surcharges. Fuel eats up a larger portion of their profit every time costs go up at the pump.
In addition, the trucking industry is finally coming out of a years-long “freight recession” that forced many carriers to operate at a loss. Elevated fuel prices compound cash flow issues for small carriers that haven’t turned a profit in years, causing many to park their trucks.
As prices rise and capacity shrinks, shippers need to start reconfiguring their transportation budgets.
When High Fuel Prices Hit Shippers
“You can bet that all the logistics managers are getting serious pressure from their executives above them: ‘Hey, what can we do here?’” said Jason. “Because shippers are blowing their budgets out right now.”
While fuel climbs, federal crackdowns on the non-domiciled CDL driver pool are also squashing carrier capacity.
Non-domiciled CDLs are licenses issued to truck drivers who are not permanent residents of the United States. The Department of Transportation found that several states were improperly issuing these licenses and is withholding federal highway funds from states that aren’t revoking the “illegal” licenses.
Experts estimate that nearly 200,000 drivers could be taken off the road because of this crackdown. Shaker is already seeing the impact of a capacity shift, but we can’t be sure if it’s caused by the CDL crackdown or a larger exodus as struggling carriers finally call it quits.
The result is an environment where shipping rates trend upwards as supply shrinks and demand increases. Shippers are facing higher rates across the board, so what can they do to prepare?
How Shippers Can Prepare for Higher Fuel Costs and Shipping Rates
This is not the same freight market shippers have operated in for the last few years. Rates are beginning to tick up, driven by fuel costs and capacity. In a market like this, carriers will choose to haul higher-paying loads to recoup losses from the freight recession. Shippers with low transportation rates should expect to see service failures as carriers drop off routing guides.
Shippers should revisit their budgets now and speak with their 3PL partners to get a better idea of where the market is heading, and what they need to do to secure capacity on their critical loads.
Shaker’s team is here to help shippers prepare for what’s to come. Reach out to Shaker Logistics to keep your freight rolling steadily.