Will the fall in oil prices be reflected in supply chains in terms of lower fuel surcharges?

Falling Oil Price With the recent re-acceleration of dropping oil prices, the latest indication from the American Trucking Association is that this year’s industry diesel fuel bill will amount to $42 billion less than last year’s bill; an enormous boost for the financial well-being of the  logistics industry and the health of global supply chains too; or is it?

According to their estimates the transport industry will spend somewhere in the region of $105 billion on diesel fuel by the end of 2015. This compares to a total of $147 billion in 2014. The estimate and comparison (which shows a 28.57% reduction) is based on data gleaned from the Department of Energy’s Energy Information Administration (EIA). But how much of the benefits will be passed on, and how can supply chain managers keep tabs on the situation?

Lowest oil prices since 2009

With ongoing reductions in the price of oil being forecast it’s likely that the total savings will be even larger. The price for a barrel of WTI (West Texas Intermediate) crude, ordered and available for delivery next month (October) was $38.22, a drop of a further £2.23 per barrel.

The price for the UK’s North Sea Brent crude (which is generally thought of as the standard benchmark price for US retailed diesel and gasoline) also fell; in this instance by $3 per barrel, down to a new low of £42.50.

These are the lowest prices since the early days of recession back in 2009. EIA (Energy Information Administration) economist Sean Hill is reported as saying just last week that the prices of diesel at the pump are likely to fall by a further 25 to 30 cents before the year is out, This is on account of the high levels of stock in excess of current demand, plus the anticipated effect of Iranian oil further adding to and increasing oil stockpiles.

How fuel surcharges work

Road transport companies recover the costs of fuel and make their mark-up by imposing fuel surcharges (FSCs) on their customers. At current oil prices the spot market indicates a surcharge of $0.30 per mile. Back when diesel was priced at $3.90 the average FSC was $0.50 per mile. But how many supply chain managers are aware of this and are policing the situation?

The fact of the matter is that it is not really certain whether the current level of FSCs accurately reflect the lower cost of diesel. Surcharges are normally revised usually within weeks and certainly no more than a couple of months after the price of oil has moved.

The dramatic sell-off that took place in the last quarter of 2014 (the period when oil prices were virtually halved) is apparently fully accounted for in the current levels of fuel surcharges according to FTR (the leading transport intelligence consultancy) Transportation Analysis Director, Jonathon Starks.

Fuel surcharges do not always accurately reflect current oil prices

The truth of the matter is however that fuel surcharges do not always shadow the rise and fall in fuel prices as quickly as they should.  Charles W. Clowdis (Junior), Managing Director, of IHS Economics and Country Risk, says that there are always some companies that lag behind others when it comes to adjust FSCs; particularly when the movement is downward. It may not be prevalent throughout the industry, but there are plenty of instances where leading transport agencies have kept FSCs artificially high several months after fuel prices have dropped significantly.

Mr. Clowdis advice to businesses that employ the services of road haulage companies is to closely check the rate of FSCs they are paying to see how they compare to fuel price fluctuations.

Transportation costs no longer a good barometer of economic activity

In the past the transportation industry has largely been seen as a good indicator of what’s happening in global supply chain activity, with particular regard to the procurement aspect in the broader economic landscape. The logic was that shipping activity is a good barometer when it comes to indicating future confidence (or lack of) in the marketplace.

But more people are now querying this approach because of the fact that the service sector comprises a higher percentage of the US economy than the production sector does.

Have you’re the fuel surcharges present in your supply chain(s) fallen to accurately reflect what is happening with world oil prices? If not what are your options? Should you be seeking to renegotiate with your transportation service providers or should you be looking to re-source?

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