Continuing fuel price volatility is here to stay: industry experts
June 1, 2006
TORONTO, Ont. - If there's one thing certain about future fuel pricing, it's that volatility will persist, Michael Ervin, one the nation's leading experts on petroleum industry trends warned transport...
TORONTO, Ont. – If there’s one thing certain about future fuel pricing, it’s that volatility will persist, Michael Ervin, one the nation’s leading experts on petroleum industry trends warned transportation professionals attending the “Let’s Talk about Volatile Fuel Prices” series of seminars running across Canada in April and May.
Ervin said that several factors, including lack of spare refining capacity, declining refinery population, a lack of incentive to invest in new refining infrastructure in North America and a declining rate of new oil discoveries are having a distinct impact on supply. Combined with rising global demand for petroleum products, this has made for a very thin margin between the available supply and demand that is easily upset by external factors such as conflicts in oil producing nations or natural disasters that wreak havoc on refining capacity and schedules.
The “Let’s Talk about Volatile Fuel Prices” series of cross-country seminars, co-sponsored by Transportation Media Research (the research arm of Truck News) and Markel Insurance, was designed to examine in detail the reasons behind fuel price volatility and future projections for fuel pricing and the options available to carriers and shippers in dealing effectively with the situation.
Ervin, who is widely quoted in the mainstream media, said he does not see any significant change to the supply issues concerning crude and refined products such as gasoline and diesel in the near term. In fact, he sees further pressure on diesel, as refineries move towards producing Ultra Low Sulfur Diesel (ULSD) to meet the US Environmental Protection Agency’s mandate for cleaner truck emissions. The new formulation can be contaminated as it moves through the continental distribution system if it comes in contact with diesel containing higher sulfur content which would mean it could not be sold as ULSD, creating the possibility of local shortages.
Most carriers have been protecting themselves against the impact of fuel price spikes on their operations through fuel surcharges. Transportation Media research conducted in partnership with the Canadian Industrial Transportation Association and CITT shows more than 80% of shippers are paying fuel surcharges, regardless of mode used. Penetration in the trucking sector is practically universal. But editorial director Lou Smyrlis, who is acting as a moderator for the seminar series, said the future viability of current fuel surcharge strategy may be in doubt.
“Today’s fuel surcharges are having downstream effects on customers. The unpredictable and volatile nature of fuel pricing and the resulting surcharges will increasingly become the cause of increasing friction in the carrier-shipper relationship,” Smyrlis said. “Many believe we may be headed toward a situation where fuel surcharges as currently designed will have to evolve. The question is how? Carriers need to ask themselves if the strategies they have successfully employed to combat fuel price volatility over the past five years can continue to be successful over the next five years.”
Fuel surcharges were implemented as a temporary measure to eliminate carrier exposure to fuel price volatility. The current wave of surcharges in the motor carrier sector, for example, actually dates back to the Spring of 1999. However, fuel price volatility has proven to be anything but temporary and so fuel surcharges have become a fixture of motor carrier operations.
“The problem with fuel surcharges is that although they have shielded motor carriers against fuel price fluctuations, they do not eliminate fuel price volatility – they simply pass it on to shippers. Continuing volatility will likely cause shippers to demand more cost certainty and stability. And in doing so large shippers may place pressure on carriers to price their fuel and other surcharges more competitively,” Smyrlis said.
He warned that motor carriers must guard against re-exposing themselves to fuel price volatility, praising the growing industry sophistication that has led many carriers to demand fair compensation for their services and coverage for costs beyond their control. He reminded the audience that the last time motor carriers left themselves exposed to sharply rising fuel prices, during the late 90s, it proved to be a major reason behind the demise of about a quarter of the small carrier base in Canada.
However, Smyrlis also stressed that carriers must be sympathetic to the needs of shippers, pointing out that although shippers can handle gradual upward increases in their transportation costs, they have difficulties absorbing cost volatility.
“How did trucking become the dominant transportation mode over the past few decades? It wasn’t because of technology; other modes are more technology adept. It wasn’t because of its human resources; it has been plagued with a driver shortage for as long as I can remember. It wasn’t because it offered the lowest price. It was by understanding and caring about its customers,” Smyrlis said, adding that even though motor carriers may find themselves in the driver’s seat right now during contract negotiations, they must “continue to be concerned about the financial viability of their customers.”
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