Tuesday, February 28, 2012

Shippers and transportation providers seek ways to combat rising oil prices

Just as the US economy is gathering momentum, high fuel prices now threatens to impede progress.  Concerns over conflicts in the Middle East has resulted in the price of a barrel of Brent crude rising over 25% since the beginning of the year, from about $95 to over $116. This rise in oil will have major implications on supply chains as supply chain managers and shippers seek ways to ease the rising costs of transportation.

Rising transport costs are now included in decisions about where to place factories and how much inventory to maintain. These decisions are reshaping global trade as nearshoring opportunities increase. Instead of relying on Chinese imports 7,500 miles away, the US is increasingly sourcing from NAFTA partners, Mexico and Canada, and Latin American countries. Western European shippers and supply chain managers may also incorporate nearshoring strategies by sourcing from East Europe and Turkey. Intra-Asia trade will increase as Asian countries link to China’s transportation and supply chain network.

Transportation modal shifts to modes that are more “energy efficient” are also another option for shippers and supply chain managers. The popularity of intermodal was evident in 2011, increasing almost 5% based on figures from the Intermodal Association of North America. Shifts from trucking to rail and air to ocean are occurring as shippers opt for cost over speed.

From the transportation provider’s perspective, rising oil prices are resulting in methods to gain fuel savings, higher fuel surcharges and attempts to pass these rising prices on to customers. Slow-steaming is being done by ocean vessels. According to NYK Line, slowing to a speed of 23 miles per hour from almost 29 miles per hour can lead to fuel savings of at least 20%. Another example is that of FedEx and UPS, both of which have introduced natural gas vehicles as an alternative method of transportation.

Fuel surcharges perhaps have been the most used method by all transportation providers to cover rising fuel costs. While these surcharges may not cover the entire cost, in 2011, they, along with higher rates, resulted in higher earnings reports compared to 2010 for many transportation providers.  

As providers attempt to pass fuel costs on to customers, customers are balking at paying this additional charge. Larger shippers tend to have a bit more influence and many times are able to push back and agree to either pay a partial amount or none at all. Smaller shippers do not have this type of influence and as such end up paying the full pass-through.

The short term outlook for oil prices remains doubtful. Many industry experts are forecasting $150 a barrel by this summer while others are expecting $200 a barrel by end of year. If this is the case, improvements in the economy could come to a halt as consumers pay more at the pump as oppose to spending elsewhere. Bankruptcies within the transportation space may also spike as many may be unable to manage the rising costs and compete effectively against larger providers.