Let’s hear it for $2 diesel

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Last fall, I participated in an industry panel discussing the outlook for trucking. One panelist, from an investment firm, said his firm’s energy expert was forecasting crude oil prices of $20 a barrel. Most people thought this boded well for the industry, but it is my opinion that fuel prices of more than $1.50 a gallon are better for the industry than fuel costs of around a $1.20 a gallon.

I recognize that this might sound insane. But as a veteran of past fuel spikes, I have observed shippers refusing to pay surcharges when fuel prices averaged around a $1.20, arguing that the price increase is temporary and small. Indeed, $1.20 is low enough that carriers often let shippers get away with not paying. Once fuel prices reach $1.50, many – if not most – shippers concede the justification for fuel surcharges.

So, you are more likely to collect fuel surcharges at $1.50 than at $1.20. And if you do get surcharges, they probably follow a pattern of increases based on the Department of Energy national self-service average price. The typical surcharge program permits the carrier to charge 1 cent per revenue mile for each whole nickel difference between the DOE weekly average and $1.10.

This formula apparently assumes that a carrier’s fleet averages 5 miles per gallon. If fuel economy is better than 5 mpg, at some point a carrier will collect more in fuel surcharges than it is paying out in increased fuel costs. There are limitations, of course. Carriers don’t collect surcharges on all freight hauled, and generally there is no surcharge applied to empty miles. But you can see that high fuel prices could be better than lower prices in some cases.

Assuming that the actual fuel prices were the same as the DOE self-serve average, the table on this page shows the annual fuel cost increase, net of surcharge revenue, for a single tractor. This analysis assumes 120,000 miles a year with 109,000 revenue miles and 11,000 empty. It also assumes that the carrier averaged $1.05 per gallon before diesel prices started to rise.

To make the point clearly, the table shows the net cost increase at different fuel economy levels and surcharge collection rates. Notice the difference between 100 percent collection at 6.5 mpg and 90 percent collection at 5.5 mpg. At $1.60, the difference is almost $3,000 a year per tractor. At an unthinkable $2.50, it’s a swing of $8,000 a year. In fact, a carrier with superior collection rates and fuel economy would be better off at $2 a gallon than at $1.05.

Few carriers collect 100 percent of their surcharges, of course. But if the DOE average tops $2 a gallon, my guess is that all carriers’ collection rates will improve because carriers with poor collection rates won’t survive. So 100 percent isn’t as unrealistic as it seems.
So if you hear forecasts that oil is dropping back to $20 a barrel, it’s not necessarily a good thing. And if you hear that diesel prices will top $2 a gallon, don’t assume that it spells doom for your company.

David Goodson is a management consultant specializing in the transportation industry. E-mail dgoodson@eTrucker.com.