On-Highway Diesel Fuel Costs: Preparing for Uncertainty

On-highway diesel fuel prices are adding more costs at the gas pump.

Trucking companies continue to ride the rising tides of an expanding economy and surging freight demand. While the good times for carriers continue to roll, higher on-highway diesel fuel prices are squeezing profit margins.

Although economic expansion has occurred continuously in recent years, since the onset of the pandemic, transportation rates have risen wildly. In this environment, carriers have control in the market, setting rate levels and choosing the most profitable lanes. In turn, they are generating higher revenues, but rapidly rising fuel costs threaten that income.

In the meantime, carriers are working to stay ready for the inevitable swing in market demand – when freight demand drops, capacity increases and downward rate pressure grows. Likewise, shippers work to proactively manage their fleets and carrier partnerships.
A big part of proactive management for shippers and carriers is understanding how on-highway diesel costs influence fuel surcharges.

Fuel surcharges are based on the U.S. Energy Information Administration (EIA) weekly reporting of fuel costs. The rates are updated and released weekly, and major carriers, like UPS and FedEx, adjust their fuel surcharges based on the rates reported for the preceding week. The most recent average diesel increase chart from the EIA is below.

Freight management parties need to know a few things about how changes within the weekly on-highway diesel prices influence landed freight spend.

Could Diesel Prices Create A Headwind For Carrier Profits?

There was a time when fuel surcharge updates were considered nominal. Fuel costs are largely responsive to market conditions, and, in the past, analysts were able to make broad predictions.
However, that was years ago, and the disruptions of today’s world happen too quickly and too suddenly to make meaningful plans beyond accounting for what’s happening for a specific week. Meanwhile, fuel price volatility is affected as the pandemic wears on, and there is military unrest in Europe.
It all amounts to more uncertainty in global trade and more cost pressures across the supply chain.

Sustainability Is Still Top of Mind and Impacts On-highway Fuel Costs

Sustainability has been a staple of global trade and freight management. In 2016, the International Maritime Organization (IMO), the United Nations regulatory authority for international shipping, issued a mandate that required ocean carriers to adopt measures to limit sulfur emissions. The prior sulfur cap was set at 3.5%, and the mandate sought to lower that limit to 0.5% by January 2020.

When the IMO issued the mandate in 2016, most of the world’s large cargo ships used bunker fuel, which is basically a high sulfur fuel left at the bottom of the barrel at refineries. What’s driving this mandate is that sulfur oxides produced when burning this fuel are harmful to human health.They can lead to respiratory problems and even lung disease. The sulfur emissions can also negatively impact the environment in the form of acid rain.

Now, companies have managed to implement exhaust gas cleaning systems, according to the IMO. And many ocean shipping companies have switched from traditional bunker fuel to diesel, but that switch comes at the impact of higher demand for diesel on a global scale. That demand inherently impacts the cost of on-highway diesel.

How Will This Affect Trucking Companies And Shippers

Consider that the shipping industry consumes approximately 4 million barrels of high sulfur fuel oil each day. With more carriers making the switch to low sulfur diesel, it could put pressure on refineries, which will likely result in higher fuel prices. That combines with the ongoing disruptions of the world to add even more motivation for carriers to increase surcharges and for shippers to prepare for those charges.

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The Big Picture: Optimize & Re-Optimize Freight Management

When fuel prices rise, carriers pass some of the cost to shippers, but maintaining profit margins requires more than raising prices. Trucking companies and shippers with private fleets must find ways to operate more efficiently. Operational efficiency is always important, but when operational costs are higher, it becomes a greater priority.
Optimization tools can reduce freight costs by consolidating loads into full truckloads, enabling ongoing route optimization, and avoiding deadheads. Furthermore, it’s not simply a change of FTL efficiency either. Instead, shippers and carriers must work in harmony across modes to do more with less, recognize the impact of fuel costs, and work to squeeze more efficiency from their networks.

MercuryGate can help achieve those goals across all forms of transportation, and in doing so, we help prepare both shippers and carriers to manage rising fuel costs now and in the future. Request a MercuryGate demo to see the platform in action today.

Get a MercuryGate demo to gain more cost visibility.

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