Running on empty

In 1981, the science fiction classic “The Road Warrior” foretold a future where gasoline is so precious that its scarcity causes civilization to break down and allows lawlessness to rule the day. It was fantasy, but like most good science fiction it was rooted in real fears. Several years earlier, a major oil embargo had created widespread frustration and even led to isolated cases of violence at gas stations.

By 1980, fuel prices seemed out of control. Prices were but a fraction of today’s levels – but not if you adjust for inflation. In fact, the inflation-adjusted national average price for gasoline is still less than it was in 1980, according to the American Petroleum Institute.

At the same time, the median U.S. household income rose 145 percent from 1980 to 2003 before adjusting for inflation and 16 percent in constant dollars. So while consumers may not like to hear it, they actually are in a better position to buy gas today than they were 25 years ago. The same probably can’t be said for trucking companies. In 2003, were your freight rates 145 percent higher than they were in 1980?

In just a few years, we may look back at $2.50 diesel as a bargain, whether or not you adjust for inflation. In the near term, we have ultra-low sulfur diesel coming on the market, adding an estimated premium of 15 or more cents per gallon. More important, worldwide demand for petroleum is growing. Meanwhile, supplies will only tighten over time. And unless we seriously diversify our sources of energy, we probably will run out of oil within a few decades. Demand is still growing, and dinosaurs aren’t dying anymore.

For the time being, however, fuel surcharges are keeping the trucking industry afloat. Today, virtually all carriers have them. In fact, revenue increases from surcharges seem to be outpacing freight revenue by a mile. A look at five publicly traded truckload carriers, all with less than $1 billion in annual truckload revenue, showed that those carriers together posted increases in freight revenue over 2003 of just under 12 percent. Surcharge revenue, however, rose 91 percent. The greatest increase in freight revenue among the five was 26 percent. Three of the five carriers reported an increase in surcharge revenue of more than 100 percent.

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Even owner-operators are commanding surcharges. According to the Overdrive 2005 Owner-Operator Behavior Report, 75 percent of all owner-operators received surcharges in the past year. Almost 87 percent of leased operators said they received surcharges compared to about 56 percent of independents. Nearly 70 percent of leased operators believed that carriers passed through 100 percent of the surcharges they should receive.

The bottom line is, diesel prices are set by geopolitical shifts and economic forces beyond the control of the largest trucking company, let alone an owner-operator. The inability to control the price of fuel should not be a competitive issue. In principle, surcharges should be mandatory. But the devil is very much in the details.

The version of the fuel surcharge bill passed by the House is weighted very heavily toward owner-operators, who admittedly have the most need for a government mandate. Some carriers and brokers will face hardships managing a federal requirement to pay surcharges at settlement when they might not see the surcharge from the shipper for weeks thereafter. And shippers might think that the initial benchmark price of $1.10 is a tad low. But now is the time to draft a compromise while truck owners have some leverage in the marketplace.

Or we can just wait. If the price of diesel continues to rise, everyone will have a surcharge. Those who don’t will be out of business. Meanwhile, our entire society should be working feverishly for alternatives to petroleum. Otherwise, get ready to armor your trucks and arm your drivers.