Impacts of falling oil prices

February 5, 2015

What are the implications of falling oil / pump prices on your freight costs?

This is a vexed question and for many reasons complicated to answer. Further, the answer is far less scientific than we would all like, although an understanding of the ‘science’ is very helpful.

Fuel surcharges have been part of freight costs for some 10 – 12 years, both domestically (Fuel Surcharge) and internationally (Bunker Adjustment Fee – BAF). Initially these were brought into place without a lot of analysis and while this has improved over the years, there is still an element of ‘art’ within the complexity of assessment.

At a very general level, same metropolitan rates (courier/taxi truck work) fuel surcharges have hovered between 5% and 10% for the last decade. Road Express (intra and interstate) has been in the low to high teens (12-13% up to 17-18%) and Linehaul has been highest, in some instances into the low 30% region. These variations are justified through a complex formula which should assume a base fuel price, fuel being removed for the annual rate reviews, and knowledge of fuel as a % of cost for a transport task.

Example 1: take a Courier task involving 25kms and 1 hour work. (1) The labour will be ~$20 for this task; (2) fuel at $1.50/L will be ~$4.50 for the 25kms, and (3) other costs might come to $5.50. So the whole job is about $30 of which fuel makes up just 15%. Therefore a 10% move in fuel will have a 1.5% impact on the whole job cost.

Example 2: a Linehaul vehicle going from Sydney to Melbourne will have (1) a labor cost of say $400 and (2) a fuel cost at $1.50/L of approx. $600, (3) let’s say $300 for everything else. In this example the total task has a cost of $1300 of which fuel is 45%. Therefore a 10% increase in fuel costs has a 4.5% impact ($60 in this example) on the job cost which is ~6% of the total cost.

In summary, using these simple examples, fuel impacts on the costs of a job are 4-fold for linehaul compared with a courier task, hence the variation in costs across different transport modes.

Note: The actual price of the fuel bought by the transport provider as it applies to surcharges is also complex. Some/most transport providers receive Fuel Tax Credits at a variable rate assessed by government twice annually. For eligible consumption the credit is ~12c/L, however it is up to ~38c/L in other instances. As at 15th February 2015 it will be 12.76c/L for vehicles over 4.5T used on public roads by a company registered for GST.

  • Click here to establish a view of your transport providers eligibility
  • Click here to see what credit values may apply

In recent times, fuel prices have plummeted by more than 50% from their peaks in 2009 (GFC impact) and again in 2013 to early 2014 (Libyan Civil War). Many transport companies have ‘base-lined’ their fuel surcharges above the current costs and therefore in some instances, users could be receiving a fuel credit (e.g.: your rates include fuel up to $1.20/L, above $1.20/L is covered by your surcharge). With fuel now at say $1.00/L in this example, there should be no surcharge and a credit per invoice period based on the over allocation of fuel costs in your base freight charges. No one anticipated fuel would ever drop this low, however it has, and this places unexpected pressure on transport companies in working out how to re-align rates and surcharges to this unexpected situation.

Click here for an article on what is happening to world oil prices and some commentary on where it is going. While there has been many articles published on this recently, this article is very comprehensive, covers the demand/supply and geo-political aspects as well as touching on the outcomes of global changes in environmental policies. It is a 10 minute read so grab a coffee in a spare moment and enjoy the insights and analysis.

So what should you be doing?

Understand how your current fuel surcharges are calculated including:

  • What is the base fuel charge in your rates and when was that ‘pegged’. Then check what you are told using a 3rd party fuel price reference site (Trans-Eco or any of the major fuel company sites)
  • Know fuel as a % of the total costs of the tasks you have performed. This should be part of your rates submission from your carrier.
  • Using the formula your transport partner has provided (should have provided) do the analysis at the current prices to determine where your fuel surcharge/credit should be today.
  • Once understood, have the discussion with your transport partners to ensure your surcharges/credit reflect current fuel prices.

I trust this information, while complex is at least interesting and possibly of some assistance.

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