The current volatility in fuel prices remains an ongoing concern for drivers and carriers. According to the American Trucking Research Institute (ATRI), fuel prices are the number one industry issue throughout the trucking space, and unprecedented increases left carriers of all sizes trying to figure out how to cut down on unpredictable fuel costs.
The ATRI’s 2022 Operational Costs of Trucking report cites the cost of fuel per mile jumped 35 percent year-over-year, which hit owner operators unable to negotiate fuel surcharges to cover the volatility in fuel prices especially hard. International events like the war in Ukraine may also lead to sporadic fuel shortages that would keep prices high, which would also worsen the inflation crisis roiling many corners of the world, including the U.S.
At Freightwaves' F3: The Future of Freight Festival in Chattanooga, several experts offered carriers and drivers advice on planning for fuel purchases in such a fast-changing geopolitical climate. Elaine Levin, president of energy risk management company Powerhouse, shared some practical advice: mitigate as many budgetary risks as possible, especially as winter approaches and unpredictable weather patterns start to affect fuel availability.
“Many end-users of fuel will set a budget, but then they don’t do anything to secure that budget,” Levin said. “‘Hope and pray’ is not a hedging strategy.”
Although Levin and fellow panelist Scott Berhang of Freightwaves agreed that alleviating risk by hedging budgets, aligning physical fuel purchases, and examining contracts and purchase formulas would help carriers prepare for further fuel price volatility, they also agreed that carriers could also prepare by keeping an eye on what’s happening abroad.
“People say, ‘the international picture doesn’t affect me, I only care about what is going on here,’ and that’s not the case anymore,” Berhang said. “This year, more so than any other year, what’s happening internationally is having a huge impact here.”
“Oil is a big geopolitical commodity and we have to care,” Levin agreed.
Is an actual diesel crisis on the horizon?
Many experts agree that if we aren’t already dealing with a significant scarcity in fuel, the industry needs to brace for one – and fast. According to CNBC, diesel prices for November deliveries have already increased by 33 percent, and that the national average price for diesel could exceed $5.50 per gallon within weeks.
One factor driving this looming shortage, says Levin, is the ongoing lack of distillate inventory. The Energy Information Administration (EIA) recently reported that distillate inventories were at their lowest levels since 2008. According to Levin, our current inventory stands at around 106 million barrels; however, the minimum operating capacity for distillates is approximately 100 million barrels.
“Below that, and the system starts to have problems,” Levin said. “Normally, we would like to see, going into the winter, a lot more than we have in inventory right now.”
How interest rate hikes could affect the freight industry
Another F3 panel offered a possible solution to the looming double whammy of high fuel prices and inflation: a federal interest rate hike designed to keep inflation rates under control. However, that solution came with a large caveat.
“The Fed has an incentive to overcorrect rather than undercorrect. It’s really existential for them,” said Ayeh Bandeh-Ahmadi, principal economist at Transfix.
However, as Bandeh-Ahmadi explained, the Fed finds itself stuck between a rock and hard place when it comes to finding the right course of action. Overcorrecting itself by hiking interest rates could lead to a recession, but a comparative lack of reaction could also cost them the trust of companies and consumers alike. “They’d be viewed – whether it’s true or not – as not having the credibility to bring inflation under control,” she said.
What does that mean for the freight industry? In all likelihood, Bandeh-Ahmadi predicts a slow-moving recession that happens in “fits and starts.”
“We can expect the Fed to raise rates longer and deeper … and perhaps a deeper recession as rates go higher,” Bandeh-Ahmadi said.
Download the Relay app and start saving big on fuel.
