Well, diesel prices are expected to continue to rise. For a change, we are not blaming the Chinese. Take your pick – Iran, Saudi Arabia, Yemen rebels, Bolton, Trump, Carter – you decide. The bottom line, though, is that diesel (and gasoline) prices are going to rise, at least for some time. The main reason is that the specific location of the terrorist activity in Saudi Arabia damaged the Abqaiq processing facility and one other facility deep inside Saudi Arabia.
The US Strategic oil reserves combined with underutilized capacity may help in the short term, but these are not long term plays and have limited impacts. The net result is that oil supplies will be disrupted for a while. This disruption will cause oil prices to increase which will force distillers to charge more at the pump for both gasoline and diesel. According to “Freight Waves”, the net increase will be about $0.60 per gallon. The question is this: “What does this actually mean for shippers?”. Answer: “About 6% increase on fuel prices.” Let’s do some math:
- Average MPG (miles per gallon) for tractor trailer: 5 MPG
- Current cost per gallon of diesel $2.92 per gallon – national average on 16 Sept, 2019
- Increase expected: $0.60 / gallon
- New expected price: $3.52 / gallon of diesel
- Approximate cost to operate a truck load (van), average cost per mile: $1.80 / mile (REF: DAT)
Math Current state
- 1 gallon of diesel = $2.92 / 5 MPG = $0.58 fuel per mile
- 1 gallon of diesel: $3.52 / 5 MPG = $0.70 fuel per mile
- Incremental diesel cost: $0.60 / 5 = $0.12 per mile
New state cost of fuel example:
- 500 miles x $0.70 fuel cost per mile = $350 in fuel for a 500 mile trip
- Incremental cost: 500 miles x $0.12 incremental fuel cost per mile = $60 per 500 mile trip
Incremental total cost
- Current state cost of operations: $1.80 cost per mile x 500 miles = $900
- Incremental fuel cost for 500 mile trip: $60 incremental cost / $900 = 0.066
- So a net increase of about 6% for your average cost of transportation
While these prices are estimated, they are fairly close to the industry averages in today’s environment. Can these costs be offset? Possibly. Last week I wrote a blog about saving money by increasing utilization.
How does all this impact the end consumer? Given that tariffs against Chinese made goods are estimated to impact holiday purchases of imported items by about 3-5%, adding another 6% increase to prices could curtail demand. Distributors and retailers are not likely to be able to absorb the impact of both the tariffs and the increase in transportation fuel costs, forcing them to pass these costs along to consumers. This all comes at a bad time for retailers – peak season.
For a change, we do not have to blame the Chinese, but prices will still go up. If you want to understand the potential impact to your specific business, give BEI Global a call. BEI Global specializes in helping manufacturers and distributors manage logistics costs and increase operational efficiency. When prices retreat, the savings remain, helping your business long term. Once we understand the actual cost impacts to the business, we can plan appropriately. Instead of blame, let us help you take responsibility for the solution!
- New York Times: https://www.nytimes.com/2019/09/15/business/saudi-arabia-oil-energy-prices.html
- Freight waves: https://www.freightwaves.com/news/truckers-fill-up-your-tank-asap-diesel-could-surge-60-by-monday-morning
- DAT.com: https://www.dat.com/industry-trends/trendlines/van/national-rates
- Transport Topics: https://www.ttnews.com/articles/cost-operating-truck-6-169-mile-atri-report-says
- NPR All Things Considered: https://www.npr.org/2019/09/16/761329078/world-oil-prices-spike-after-saudi-facilities-attacked