William B. Cassidy, Ari Ashe, and Greg Knowler | Mar 22, 2022 9:12AM EDT
ith North American oil prices closing at $96.44 per barrel on March 15, after jumping as high as $123.70 on March 8, shippers are still trying to assess the new cost of fuel and its impact on transportation amid the ongoing Russia–Ukraine war. For now, they’re bracing for higher surcharges, further pushing up already elevated rates for ocean, surface, and air cargo.
Fuel prices were already rising prior to Russia’s invasion of Ukraine, and the additional volatility and uncertainty caused by the conflict are significant enough to shift the emphasis in US landside supply chains from speed of delivery to cost, a major reset for shippers focused intently on velocity since the start of the COVID-19 pandemic. How big a reset that will be depends on how high oil and fuel prices go.
“I had already included a 10 percent increase in [domestic] fuel surcharges in my budget, and that’s been blown out of the water,” Holly Pearce, director of logistics at Santa Fe Springs, California–based battery maker C&D Trojan, said in an interview. “Best case, I’ll be paying $1.5 million more, worst case, $3.9 million more, and I already had $7 million baked into my budget for domestic surcharges.”
Marine bunker prices have begun to retreat after spiking in the two weeks following the initial invasion of Ukraine on Feb. 24, but the price of diesel in the US, which informs fuel surcharges imposed by trucking carriers and railroads, has continued to climb, as has the price of gasoline. Jet fuel prices were dropping by mid-March but were still up by double-digit percentages from mid-February.
The average price of very low-sulfur fuel oil (VLSFO) in major hub ports stood at $895 per metric ton March 14, down from a high of $987/mt March 9 but still well above the pre-invasion price of $726/mt on Feb. 23, according to oil price reporting agency OPIS.
What’s more, the price of VLSFO, which powers approximately 70 percent of the global container ship fleet, on Feb. 23 was already much higher than the 2021 high of $617/mt set on Oct. 26.
Likewise, high-sulfur fuel oil was trading at $623/mt on March 14, down from $674 on March 9 but up from $534/mt on Feb. 23 and from the 2021 high of $504/mt on Oct. 18.
Hapag-Lloyd CEO Rolf Habben Jansen told reporters in a March 10 briefing that rising energy prices represent a “real worry” for carriers. “Fuel prices have gone up from $500 a ton to around $1,000 a ton,” he said. “We burn 4.5 million tons a year, so that means an extra cost of between $2 billion and $2.5 billion.”
Shippers will feel the pinch of the higher fuel costs via the traditional bunker adjustment factors (BAFs) that typically lag fuel price increases by one to two months. But Habben Jansen ruled out imposing the deeply unpopular emergency bunker recovery surcharges that were levied by several carriers in 2018 as fuel prices rose ahead of the US–China trade war.
“Bunker prices are passed on in longer contracts with a delay based on our fuel clauses that are included in the vast majority of our contracts,” he said. “We do not intend to come up with an emergency bunker surcharge because we don’t think it is needed — or right — at this point.”
Sea-Intelligence Maritime Analysis in its March 6 Sunday Spotlight newsletter estimated that if bunker fuel prices remain at their current level for the rest of the year, the container shipping industry will incur an additional annual cost of $7 billion. That would result in an average fuel cost of $39 per TEU.
Lars Jensen, CEO of Vespucci Maritime and a JOC analyst, warned that those added costs would soon be passed on to shippers. “As the situation still spirals more out of control, we have likely not seen the peak yet, and shippers should expect record-high bunker surcharges in their next rate adjustments,” he said in a March 7 LinkedIn post.
Fuel prices independent of crude
Moderating oil prices hardly put a dent in the average cost of US diesel fuel, which has climbed more than $1.50 per gallon since last fall, according to the US Energy Information Administration (EIA).
The price of crude oil accounts for about half the price of diesel, according to the EIA, but demand is a factor too. Intense freight demand and resulting supply chain disruption are likely to keep the price of diesel and gasoline elevated even if they do moderate in the weeks ahead.
As of March 14, the average EIA US diesel retail price — used as a base for trucking and rail fuel surcharges — was $5.25 per gallon, up $1.57 from the $3.68 per gallon average for October and November 2021, when many US shippers were budgeting their 2022 surface transportation costs. The American Automobile Association’s (AAA’s) average US daily fuel price held firm at $5.11 per gallon on March 15, compared with $4.76 per gallon a week earlier and $3.08 per gallon a year earlier.
On-road diesel prices on the West Coast jumped to $5.87 per gallon as of March 14, a $0.48 gain from $5.39 per gallon the week before and a $1.16 jump over two weeks, according to a JOC.com analysis of EIA data. Although truckload linehaul rates from the West Coast have slipped as port congestion drops and demand softens, a cargo surge due to hit Southern California in coming weeks will send costs higher.
Shippers will end up paying more on their final invoices because of the fuel surcharges, according to DAT Freight and Analytics.
Overall, US shippers can expect a 4 to 5 percent increase in trucking fuel surcharge costs if fuel prices remain $0.50 per gallon above pre-invasion levels, and that quickly adds up to millions of dollars for large shippers, Ben Cubitt, senior vice president of consulting at third-party logistics provider Transplace, told JOC.com. “It could become an 8 percent increase if [diesel prices] go higher,” he said.
For some shippers, the increase in fuel prices has already hiked their transportation costs by double-digit percentages, according to Mike Regan, chief relationship officer at shipping software and consulting firm TranzAct Technologies.
“You have shippers whose freight costs have gone up 3 to 10 percent over a few weeks,” Regan said in an interview. “When you’re hit with rising fuel prices with no options to fall back upon, how often you ship and who you ship with become very important.”
Shifting shipper priorities
Until now, speed has been the critical factor for many shippers when choosing US surface modes, but the sudden volatility in fuel costs — the latest in a long string of disruptive events — will affect the choices shippers make when determining how to move freight within the United States.
Whereas C&D Trojan had been sending more regular “light” truckload shipments of approximately 20,000 pounds, rather than aggregating full truckloads that weigh closer to 60,000 pounds, for the sake of expediency, the battery maker will now weigh the transit time benefits against the rising cost of trucking services.
“We’ll be less inclined to ship less-than-truckload [LTL] as well,” Pearce said. “We’re going to have to put our foot down with some customers and tell them waiting for one truckload may be better than receiving four separate LTL shipments over a week or two,” Pearce said.
Shippers may also be more inclined to use intermodal rail, particularly on longer hauls, because the related fuel surcharges will be cheaper than for trucking. Even though Union Pacific Railroad and Norfolk Southern Railway raised their fuel surcharges in the latest weekly adjustment, the math still favors the rail option.
“All of a sudden, this makes the case for intermodal much stronger,” said Cubitt. “The fuel surcharge for intermodal is about half of that for truckload. If the surcharge was $300 for a truckload move and $200 for an intermodal move, this could make the gap much bigger. If a shipper isn’t already shipping long-haul intermodal, this will really push them to do it.”
From Los Angeles to Chicago, one of the highest-volume lanes in the US, a shipper using long-haul trucking would pay as much as $1,700 in fuel surcharges in today’s market compared with about $1,050 for intermodal.
Switching modes is complicated by tight capacity on the highway and a shortage of chassis at inland intermodal rail yards, as well as by rising intermodal rail fuel surcharges and other factors. In other words, there are no easy modal choices for US shippers after two years of COVID‑19 pandemic-related disruption.
Higher fuel costs will further constrict capacity by cutting the number of smaller carriers and the miles they cover. “At these levels, a [small] carrier is going to spend an extra $20,000 annually in fuel than in the last couple years,” said Dean Croke, principal analyst with DAT.
Croke believes that could bankrupt owner-operators hauling loads on the spot market, or at least cause them to rethink which loads to haul. “If drivers start to stay closer to home, do the shorter hauls, and reduce the longer fuel-intensive trips, then that could make capacity even tighter than last year,” he said.
The trade-off between expedited delivery and soaring fuel costs will be at the forefront of shipper negotiations with customers. “You need to look at customers who are ordering more than once a week and talk to them. If those customers want an expedited delivery, they’re going to have to pay for that,” said Cubitt. Shippers, he added, are not going to be able to absorb the elevated costs headed their way.
As a result, cargo owners will have to rethink how they ship in terms of equipment utilization, not just mode. “Average truckload weights have dropped 10 to 20 percent for shippers over the past year because of network inefficiencies and disruption,” Cubitt said. “That means shippers are using more trucks. If they can eliminate one out of every 10 truckload shipments, that’s a big improvement.”