Looming Diesel Shortage 2020 Blog

Preparing for the Looming Diesel Shortage: IMO 2020

U.S. trucking companies continue to ride the rising tides of an expanding economy and surging freight demand. Carriers have control of the market, setting rate levels and choosing the most profitable lanes, resulting in higher revenues. While the good times for carriers continue to roll on, driver compensation and higher fuel prices are starting to squeeze their profit margins. Currently, driver compensation accounts for the greatest cost, as carriers continue to compete for drivers in a tight market. But on the horizon, the industry faces a potential diesel shortage that could send fuel prices soaring.

Could Diesel Prices Create a Headwind for Carrier Profits?

On the issue of fuel, the price of on-highway diesel, as of October 22, 2018, stood at $3.38 per gallon, which was 58.3 cents higher than the same time a year ago. Some analysts are forecasting diesel prices will likely continue to rise through 2019. As of October 24, crude oil prices hovered in the high $60s to high-$70s range per barrel, which is $15-18 higher than a year ago, and analyst are predicting that number could go into the $80s or $90s in the fourth quarter.

In June 2018, Truckstop.com’s Chief Economist Noel Perry wrote that “fuel was up more than 50 percent since early 2016 and looks like it will get higher.” Perhaps it’s too soon to tell, but we know that there are multiple factors that could lead to higher fuel prices, including the growing global demand, the lower production and export from Venezuela, and ongoing pipeline constraints in some regions of the United States. But the bigger concern for many in the logistics/shipping industry is IMO 2020.

What is IMO 2020?

In 2016, the International Maritime Organization (IMO), the United Nations regulatory authority for international shipping, issued a mandate that will require oceangoing ships to adopt measures to limit sulfur emissions. The current sulfur cap is set at 3.5 percent, and the new mandate would lower that limit to 0.5 percent. The new mandate will go into effect on January 1, 2020 and will affect 70,000 ships worldwide. IMO has said it doesn’t plan to move back that date, but it’s unclear how the mandate will be enforced equally across the globe.

Today, most of the world’s large cargo ships are using bunker fuel, which is basically what’s left at the bottom of the barrel at refineries. At issue, and what’s driving this mandate, is that sulfur oxides are harmful to human health, and can lead to respiratory problems and even lung disease. The sulfur emissions can also negatively impact the environment in the form of acid raid.

In the short term, some shipping companies will install exhaust gas cleaning systems, known as ‘scrubbers.’ But it’s expected that most will switch from bunker fuel to a low sulfur diesel. According to a 2017 survey from UBS, 74 percent of shipping companies plan to switch to diesel.

How Will this Affect Trucking Companies and Shippers?

So, with all of this talk about ships, what does it have to do with land-based transportation? This new IMO mandate highlights just how interlinked the various modes of transportation are. Changes to one mode can have a ripple effect felt across the entire global supply chain. Consider that the shipping industry consumes approximately 4 million barrels of high sulfur fuel oil each day. If most switch to low sulfur diesel, it could put pressure on refineries, which will likely result in higher fuel prices.

Prepare for Higher Prices Now

The price of diesel hasn’t cracked the top 10 industry issues since 2013, according to the American Transportation Research Institute (ATRI). In fact, fuel prices topped the list of concerns in 2008, but has gradually fallen off. Today, the driver shortage, the ELD mandate, and Hours of Service top the list of concerns, but the impact of the IMO mandate could put fuel prices back front and center. Low-sulfur diesel is critical to trucking, and the world’s ocean carriers could suck up a lot of the world’s fuel supply.

When fuel prices rise, carriers can pass some of the cost to shippers, but to maintain profit margins requires more than raising prices. Trucking companies and shippers with private fleets will need to find ways to operate more efficiently. Operational efficiency s always important, but when operational costs are higher, it makes it that much more important.

Optimization tools can help reduce freight costs by ensuring trucks are fully loaded, meaning fewer loads, and you can better manage backhauls to remove empty miles from your network. And, using what-if analytics can help drive better decision making.

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