Viewpoint: Time for an intelligent conversation on fuel pricing
April 1, 2006
What's the best price you think you could get for a portable DVD player? $100, $80, maybe even as low as $50? Well, university students this year went off to school with a $39 DVD player packed in the...
What’s the best price you think you could get for a portable DVD player? $100, $80, maybe even as low as $50? Well, university students this year went off to school with a $39 DVD player packed in their bags. The significance of this may have been lost on them, but that $39 DVD player, likely made in China, symbolized a major driving force in our economy: the great push among all manufacturers to compete by constantly delivering lower prices for a wide range of products.
And, since manufacturing is an important customer base, this does have an impact on trucking.
Every summer our Transportation Media Research group conducts a survey of about 700 shippers across Canada. We ask them to identify their greatest challenges. Every year they tell us the same thing: Reducing costs is a major concern, particularly among manufacturers.
Particularly problematic for them is adjusting to cost volatility. Competing on the price of your products requires very fine calculations, and wildly fluctuating resource or transportation costs wreak certain havoc on the bottom line.
Yet that’s exactly what’s happening thanks to the current nature of fuel pricing. Forty percent of shippers reported hikes to their fuel surcharge of 10 per cent or greater in 2005.
The trucking industry has been more successful than any other mode in introducing fuel surcharges. But the weakness of the current method of surcharging is that it doesn’t neutralize the volatility of fuel pricing, it just passes it on the shipper. And after a couple of years of hefty surcharge increases, shippers are getting anxious.
The Canadian Industrial Transportation Association (CITA), a lobby group for shippers which includes big-name companies such as Unilever, Alcan, Noranda and Canadian Tire, has questioned the revenue based model of fuel surcharging because the charge depends on the dollar amount a shipper is billed, rather than on the carrier’s actual fuel consumed for that particular shipper’s haul.
Is the current fuel surcharge system really the best approach? Is a per-mile based formula better? Or is fuel hedging, which limits the maximum price the carrier pays for fuel over a given period, perhaps a better solution for both carriers and shippers? It is a strategy that has been used in the air, marine and agricultural industries.
I don’t know what the best approach is. What I do know is that for carriers to remain profitable they must have a viable way to recoup their fuel costs and that for shippers to remain competitive they must have an effective way to deal with cost volatility.
I also know it’s time shippers and carriers got together for an intelligent discussion on all the options to dealing with fuel price volatility.
To that end, I will be participating in a cross-country speaking tour to discuss fuel price volatility and its impact on both carriers and shippers. I will be interviewing experts live at each venue to examine all the options.
We too have been collecting data on this issue for a few years now and we want to share it with you. The tour is sponsored by our Transportation Media Research group in partnership with Markel Insurance. I hope to see you there.