WHY DOES DIESEL FUEL MATTER?
By Carolyn Berg | April 4, 2022
Fuel has continued to increase at a rapid rate for the past 18 months. This increase in the cost of fuel has accelerated inflation across the economy in the United States. Trucking companies live off a cash flow business model, which can fluctuate heavily based on market conditions and immediate incurred expenses. This article will highlight the hot topic of gas prices rising and how it more closely impacts the logistics industry and diesel fuel.
Source: U.S. Energy Information Administration, Gasoline and Diesel Fuel Update
Analyzing this data, we noticed that diesel prices have increased $2.03/gallon year over year and $0.05/gallon week over week. For an average truck that is an increase of about $867 per tank fill up. Depending on the markets that these trucks are operating in, this expense can fluctuate heavily. The combination of miles and markets can cause drastic changes in bottom-line profit for an individual carrier.
EFFECTS ON LOCATIONS
Comparing the prices on the graph, it’s clear that a driver on the East Coast or the West Coast would have to pay a substantial amount more in fuel as opposed to a driver in the Midwest or Gulf Coast. For drivers, this is a microeconomic effect due to the territories in which they fuel their equipment the most. The supply and demand of oil and given a population of a territory drives these effects over most of the United States.
Source: Freightwaves, Just 3 years after 2019’s trucking bloodbath, another is on the way
This graph depicts the outbound tender volume index. The red line indicates the outbound volume index for 2021, the blue line is November 2021-April 2022. The green dotted line is the outbound tender volume index on March 24th, 2022. There is roughly an 18% decrease in available freight in the market than there was a year ago today. The supply and demand effect of this has plummeted spot market rates from their all-time highs. The decrease of rates with the increase of incurred fuel expense in such a quick period of time is creating disruption for trucking companies’ cash flow.
WHY IT MATTERS
In transportation, products need to get from point A to point B regardless of diesel price. Consumer demand is what causes spikes or lulls in outbound freight volume typically. In summary, the importance lies in the correlation between fuel price and the demand for trucks in the United States transportation industry, which can push or curb inflation across the economy.
If freight rates continue to come down and fuel continues to rise, will shippers be paying more than they were 12 months ago? Are freight rates plummeting or are market conditions normalizing? Let us know what you think!