The threat of another massive spike in fuel prices looms despite the increase in crude supplies flowing from the Middle East.After successive weeks of price drops, crude oil prices started rising agai...
The threat of another massive spike in fuel prices looms despite the increase in crude supplies flowing from the Middle East.
After successive weeks of price drops, crude oil prices started rising again by the end of July. They hit $28.59 (all figures in U.S. dollars) a barrel on the New York Mercantile Exchange and $27.62 a barrel on the International Petroleum Exchange amid concerns the recent drop in prices would lead Saudi Arabia, which began the downward price tumble with its surprise decision to open its pumps, to cancel its output increase plans.
Yet even if crude prices resume their recent downward trend that will only impact diesel prices in western Canada, a market which follows the price of crude. The market in eastern Canada is affected by different factors.
“Prices in Ontario, Quebec and the Maritimes will follow the New York Harbor commodity price of No. 2 fuel oil, which is already refined. So what you could have is an abundance of crude but a shortage of finished product, which could actually push the price of diesel up,” says Ron Rosnak, an oil industry analyst with En-Pro International, an Oshawa, Ont.-based consulting company.
In truth, says Rosnak, the oil companies have much bigger problems than the availability of crude. Inventories of diesel fuel and furnace oil — which are refined at the same time and from the same middle distillate — remain dangerously low, and the oil companies are running out of time to make up the shortfall. They had to spend the summer producing gasoline, which was also on short supply. Middle distillates were being produced but diesel fuel is also used to power some hydroelectric plants, which were busy producing power for air conditioning in the summer. All that prevented the building up of inventories.
Rosnak believes the price of diesel should remain relatively stable until the fall, when an early cold snap could lead to a price spike.
“It is still possible for the inventories to be built up, but there are some big hurdles to overcome,” Rosnak says. “And if the prices spike again, everyone will feel it in the price of consumer goods, not just the truckers.”
According to Tom Kloza, a petroleum industry analyst with New Jersey-based Oil Price Information Service, anyone involved in the trucking business should start planning for a “winter of discontent” right now.
“It is not a good situation,” Kloza says. “You can probably expect to get a break on diesel price hikes for a few months, but once the leaves start changing, it could be `here we go again.'”
Kloza says people involved in the trucking industry still have some time to plan for potential fuel price hikes next winter. He suggests it would be “prudent” to talk to lenders, suppliers and customers about fuel surcharges that could be put in place in the event of another diesel price spike.
“If you are not doing it, you are living on waterfront property in South Florida at the start of hurricane season,” is his less-than-subtle advice to carriers.
While carriers admit that it wasn’t always an easy sell, most say they have managed to get their customers to agree to some kind of fuel surcharge arrangements — if not on existing contracts, then certainly on new ones.
“The issue of high fuel prices has been around long enough now that it’s not a strange item to bring up when you are negotiating with a customer,” says Jeff Preis, director of marketing for Winnipeg-based Bison Transport. “The issue was always there, but it was just not something you raised when talking to customers last year. But after last fall and winter, we were forced to deal with it, and deal with it rapidly. Now fuel surcharges are attached to all our pricing packages.”
Preis says Bison uses a sliding scale for its surcharge that is designed to respond to both temporary spikes and decreases in the price of fuel.
Trans-X, meanwhile, has had a fuel surcharge program in place for several years, says Joe Trigiani, manager of the company’s Brampton, Ont. terminal. But it also implemented a price cap on yard fuel on Feb. 1., just in time for the spike.
“As the price kept going up and up, we knew we had to do something, so we implemented the cap as part of our pay structure,” Trigiani explains. “As long as the drivers purchase the fuel from us, we eat anything above the cap.”
Like Bison, Trans-X also employs a fuel surcharge that works on a sliding scale. For every five-cent-per-litre increase in the price of fuel, the surcharge jumps up a percentage point. That way, says Trigiani, the customer doesn’t absorb everything: “Rising fuel prices still affect our bottom line; we absorb some of the cost and the customer absorbs some of it.”
Debbie Caldwell is the owner of Ottawa-based Goldie Mohr Ltd., a company that specializes in hauling aggregates and moving heavy equipment. She has tried to make allowances for higher fuel costs by inching up rates on new contracts, but says her profit margin would still suffer if the price of fuel rises to last winter’s levels.
“We increased prices on some equipment related strictly to the price of fuel, and no one had a problem with that,” Caldwell says. “But contracts that are already in place we can’t do anything about. We are locked into a price and just have to bite the bullet if fuel goes up.”
Another carrier that could see its profit margin suffer in the event of a sudden price spike is Mackie Transport of Oshawa, Ont. With many of its owner/operators on the ropes last February, Mackie managed to secure a fuel surcharge from its customers in the automotive industry. Rather than being tied to the price of fuel, however, Mackie’s surcharge is a fixed percentage that is reviewed monthly. But while that structure gives the customer time to prepare for an increase, it also means Mackie can’t respond immediately to sudden jumps in the price of diesel, like the one that hit last February.
Many carriers have also taken steps to protect their owner/operators from another fuel price spike. Most of the career ads for owner/operators in our sister pubication, Truck News, include the promise of “fuel surcharge paid.”
The shipper community, meanwhile, has had some time now to grasp the reality of high fuel prices.
“I won’t deny that when the carriers started raising the issue of fuel surcharges there were some heated discussions,” says Bob Armstrong, president of the 600-member Canadian Importers and Exporters Association. “But I think both sides understand the issues better now. There was a learning curve that everybody had to get through.”
The feeling is the same among the 200 corporate members of the Canadian Industrial Transportation Association, according to managing director Lisa MacGillivray. But, MacGillivray cautions, the organization also has some concerns about fuel surcharges.
“Shippers understand that the price of fuel is high at the moment, but they aren’t paying without question,” she says. “It is an ongoing discussion. No carrier should just think the fuel surcharge is automatic.”