Going over my speaking notes while flying to Vancouver to host a half-day session on the impact of fuel price volatility on transportation, I couldn’t ignore the strong sense of deja vu.
That’s because, I hosted a series of similar events across Canada just two years ago.
The only differences were the organization I was working with (CITT this time rather than Markel) and the audience (mostly shippers rather than carriers).
The one constant between this event and the previous events two years ago, unfortunately, is that carriers have not done enough to deal with the elephant in the room – the price of crude (up to $130 a barrel this time).
The main conclusion from our educational events two years ago stands true today: the only certainty about fuel pricing is continued uncertainty and volatility.
While carriers have done the respectable thing by protecting themselves through fuel surcharges, I don’t think they’ve gone far enough.
When fuel prices get so high that carriers have to charge their customers 40% to move their goods it makes me wonder if:
A) Such high surcharges are sustainable over the long-term. Our annual shipper research shows that a combination of high rates and surcharges have caused almost half of the nation’s shippers to change their mode of choice for at least some of their shipments. Trucking has both lost and gained freight due to this trend;
B) Carriers, during this time of slumping freight volumes, are starting to eat some of the increase in fuel costs because they don’t dare go to some customers with yet another surcharge increase.
Carriers that have taken steps to improve their fuel efficiency through driver training, fuel-saving equipment and turning on the speed limiters in their fleet of trucks are to commended but there’s one more obvious strategy that needs pursuing: A financial strategy that protects both carriers and their customers against diesel price volatility.
That strategy – a fuel hedging solution called a call option – has been used successfully for decades by the airlines, rail, marine and agricultural industries.
A call option caps fuel prices over a set period of time – say, six months or a year.
Motor carriers enrolled in such an option pay a protection fee and get reimbursed if prices rise above the cap.
If prices drop below the cap, they don’t get their protection fee back but they do get the benefit of the lower fuel prices – they’re not locked in to buying fuel at the capped rate.
Considering carriers could pass on the cost of the protection fee to shippers and give them peace of mind in the process, it’s beyond my understanding why this strategy has not caught on in the motor carrier industry.