The price of crude oil per barrel in May of 2015 was $65. By February of 2016 crude had nosedived to $28 per barrel—a 57 percent decline.
When we experience these highly-publicized cost declines in crude oil, our shipper-customers naturally wonder if they’ll see similar savings in trucking freight rates. Conventional wisdom suggests a shipper’s transportation costs will decline at the same rate of declining crude for the same reason airline travelers expect lower ticket prices when airlines pay less for fuel.
Here’s why crude oil per barrel pricing can be deceiving. A 57 percent decrease in crude oil costs does not translate into an equal decrease in your fuel surcharge rate because diesel fuel costs did do not fall by the same amount, and fuel costs only account for a small percentage of the total cost of shipping freight.
The Trickle Down Effect of Cheap Crude and Trucking Rates
For example, the cost of diesel fuel in May 2015 was $2.88/gallon; in February 2016, it was $1.99/gallon, a 30 percent decrease. Even though crude dropped 57 percent during that same period, the fuel itself only dropped 30 percent. And during that same timeframe, the fuel surcharge per mile went from $.35 to $.17, a 51 percent decrease.
The trucking and logistics industry applies fuel surcharges to loads to account for significant variations in fuel costs, compared to historical levels. The fuel surcharge is a method company’s use to share and transfer risk. For carriers, where profit margins can be razor thin, the fuel surcharge helps to balance risk while not gouging customers (shippers).
Most carriers and shippers use a fuel surcharge program of some form. For the sender, let’s look at how that fuel surcharge can affect the average load cost. With the 51 percent decrease in per mile surcharge noted earlier, an average 1,000-mile trip equates to fuel savings of $180.
Assume the total cost of a 1,000-mile shipment from your loading dock to your customer is approximate $2.00/mile, or $2,000. Therefore, for a shipment that costs roughly $2,000 only $180 of that cost is your fuel surcharge amount or just nine percent of the total charge. $180 ÷ $2,000 = 9%
To summarize, here again, is the math behind declining fuel costs and how that savings trickles down to a typical shipment: (Figures apply to actual crude oil and diesel fuel price fluctuations between May 2015 and February 2016.)
1. Crude oil price drop per barrel= 57%
2. Diesel fuel price drop per gallon= 30%
3. Fuel surcharge drop on a 500 to 1,000-mile shipment= 9%
But it’s the shipper, not the carrier; that benefits the most from dropping fuel costs, even if it’s only nine percent, in this example. Most carrier costs are tied up in capital equipment (tractors and trailers) and driver salaries, which are more challenging to moderate in a landscape with fewer available drivers.
At LPS, we are asked a lot by shippers and carriers if they will see lower overall shipping costs as fuel costs decline. Again, for shippers, the answer is a definite yes, but it depends on the cost of crude and what that means for the price per gallon of fuel.
Also, remember, numerous other factors affect shipping rates: carrier capacity, seasonality and geography can all add into this complex equation that can vary several times a day.
At LPS, we’re always on the lookout for strategies and tactics we can employ to lower your overall shipping costs. While lower crude oil prices don’t always net big savings, smaller, incremental improvements through a range of tactics add up to significant savings.