Fluctuating prices causing market unpredictability

The cost of diesel fuel has grown at a steep incline since the start of the COVID pandemic and subsequent geopolitical conflicts, affecting stakeholders in every corner of global supply chain logistics. Prices have risen across all modes of freight transport, making it increasingly expensive to move goods from their point of origin to final destinations by land, sea, and air.

Over the past two years, spot rates have shot up across the world:

Data from US Energy Information Administration
  • Towards the end of 2021, the cost to move goods by air was about 2.5 times more expensive than pre-pandemic. Air freight rates from China to the US peaked at $15.13 per kg, and to Europe at $8.82 per kg in December 2021.
  • Ocean container rates from China to the US coasts have nearly quadrupled since pre-pandemic, but have dropped off since March 2022.

Although fuel prices have been on an upward trend for years, week to week volatility has created new challenges for logistics companies, who typically set fuel surcharges based on fuel prices listed the previous week.

As prices quickly rise and fall – like when the retail price for diesel fuel jumped 28% after Russia’s invasion of Ukraine in March – it becomes increasingly difficult for logistics companies to predict and set profitable rates.

Crude oil prices per barrel (2010-2022)

Data from Macrotrends


How rising fuel costs are affecting logistics

For most ground carriers, fuel has now become the largest expense after driver salaries, making up roughly 15%-25% of the total cost of operation.

Ground freight providers and truckers across the US have been heavily impacted. This adds to the weight of an industry already struggling with a labor shortage of more than 80,000 drivers in 2021.

Rising fuel prices have forced carriers to increase their spot rates significantly, or risk taking a loss. But they’ve also encouraged some carriers to find alternative solutions to remedy and lighten their reliance on fuel.

On an ecologically positive note, this has led to more sustainable efforts in road transport processes. Many carriers are now actively taking steps to reduce their fuel consumption, from smarter technology to driver training. Freight service providers like Averitt are taking measures like:

  • Reexamining their cargo vehicles to optimize aerodynamics
  • “Installing auxiliary power units on sleeper trucks” to provide drivers access to heat and air conditioning without idling the engine overnight

Yet despite these efforts, higher fuel costs will continue to not only affect logistics companies, but also shippers and their subsequent customers.

The consequences for shippers and proposed solutions

As Direct Drive Logistics explains, “It is an outward domino effect: If it costs more for the freight carrier to transport the freight, the shipper is going to be charged more to make up for this. If the shipper is going to be charged more to transport the freight, the receiver is going to be charged more to make up for their added costs.”

As these logistics expenses trickle down to consumers, prices of food, energy, and household goods have risen to their highest in four decades.

US annual inflation reached 8.6% in May 2022, driven by ongoing port congestion and supply chain bottlenecks. This has led to an overall drop in consumer demand, causing some shippers to struggle with growing retail inventories and overstock.

The good news is, there are many ways shippers can streamline their processes to reduce fuel consumption and increase operational efficiency. For example:

  • Instead of requesting multiple shipments from a single warehouse to the same buyers on the same day, shippers can consolidate these orders into one daily shipment, eliminating redundant trips and significantly reducing fuel usage.
  • Cutting down the regular shipment schedule to fewer days in a week, to minimize carrier transportation frequency without affecting volume of cargo loads.
  • Nearshoring, prioritizing local suppliers and distributors to reduce carbon footprint.

Although more stops along trade routes means more revenue for freight carriers, balanced collaboration between carriers and shippers is the key to combating the negative effects of rising fuel costs on the entire supply chain.

That starts with implementing smarter workflows and considering ecological and environmental factors when deciding supply chain policies.

Sources:

https://www.freightwaves.com/news/weathering-rising-fuel-costs-requires-team-effort-between-shippers-carriers

https://www.eia.gov/petroleum/gasdiesel/

https://www.freightwaves.com/news/sky-high-container-shipping-rates-are-falling-back-to-earth

https://www.freightwaves.com/news/fuel-price-volatility-positive-and-negative-implications-for-transportation-providers

https://www.truckinginfo.com/10154800/ata-truck-driver-shortage-hits-record-high-of-80-000

https://www.directdrivelogistics.com/logisticsNews/LogisticsFuelCosts

https://www.wsj.com/articles/us-inflation-consumer-price-index-may-2022-11654810079