The retail price of diesel fuel has jumped 28% since Russia invaded Ukraine to about $1.12 per gallon. Fuel prices are higher than they were in 2009 when the DOE reported an average price of $4.72 in May. It’s still unclear how long this will last, but there are both good and bad implications for carriers and the results vary wildly depending on your purchasing power.
Diesel remains the primary fuel source for Class 8 trucks and accounts for approximately 15-25% of total operating cost. Larger fleets tend to have relationships with fuel suppliers and get fuel at or near wholesale or rack prices, depicted in the blue line of the graph (ULSDR).
Small farms don’t have the connections or leverage most of the time to get their fuel at less than retail price, which is represented by the green line in FreightWaves Diesel Truck Stop’s proprietary pricing data (DTS) – which produces a daily number against the weekly DOE value. The lack of buying power puts smaller operators at a pricing disadvantage, especially when rack prices fall rapidly as they have this week.
The orange line is the fuel spread or the retail price minus the rack price. This number is only viable for carriers who can buy fuel based on the displayed price. When the spread is high, these carriers have more opportunities to net profit from their contract accounts. When the gap closes quickly, carriers can lose money on fuel. The reason for this polarizing result lies in the way fuel costs are passed on to customers.
In just about every rate agreement for anything that travels on less than a full truck load and a full truck load, there is a surcharge table that explains either a percentage of the total cost or an ancillary rate per mile depending of the reported weekly DOE. average price of ultra-low sulfur diesel. This chart is largely calculated based on fleet average fuel efficiency, which tends to be between 6 and 6.5 miles per gallon and looks like this for a full load:
From March 1 to Wednesday, the rack price went from $3 per gallon to $3.93 per gallon, while the fuel surcharge tables were based on a retail price of $4.10 per gallon.
Using the scale example, carriers charged their customers about 39 cents per mile for fuel while their costs increased from 46 cents per mile to 60 cents per mile (31%) if we assume an average of 6, 5mpg. In this example, the carrier loses 14 cents per mile at the end of the week.
On the other hand, the carrier gets that money back if volumes are similar in subsequent weeks, as rack prices have fallen and retail prices have remained high. This level of volatility is not typical, but it can wreak havoc on carriers’ and shippers’ bottom lines, and the two entities cannot hedge all risk.
As mentioned earlier, smaller carriers and operators need to pass on the retail price and try to stay competitive. The good news is that their customer base tends to be different from that of corporate fleets, favoring smaller shippers and more specialized freight. The bad news is that they are at a distinct disadvantage when going up against carriers with buying power. Some of these issues can be overcome with reduced overhead and selective refueling.
Fuel costs are more than likely already having an impact on keeping transport costs high, although hard to see. In the table above, the yellow line represents the national average spot rate costs for van loads according to Truckstop.com, minus estimated fuel costs based on the surcharge table presented more easily. The orange line is the all-inclusive rate.
The takeaway here is the widening gap between these two lines, which represents a potential increase in fuel costs as a percentage of the total – in this case, 12% to 17% year over year. In other words, spot rates could be somewhat supported by higher fuel prices.
So far, it looks like the fluctuating fuel costs of the past few weeks will be a washout for large fleets in terms of profitability, but rising fuel costs and increasing volatility have long-term implications on inflationary pressure .
About the chart of the week
The FreightWaves chart of the week is a selection of charts from SONAR that provide an interesting data point to describe the state of the freight markets. A chart is chosen from thousands of potential charts on SONAR to help participants visualize the freight market in real time. Each week, a market expert will post a chart, along with commentary, live on the front page. After that, the chart for the week will be archived on FreightWaves.com for future reference.
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