A steep run up in diesel prices drained some half a billion dollars from the trucking industry in the last month, sending motor carriers and shippers searching for new ways to cut soaring transportation costs and spending and prompting new worries that energy costs would slow down the national economy.
With most fuel mitigation tactics already spent, most shippers and carriers were at the mercy of the marketplace last week after diesel prices measured by the federal government hit their second straight weekly record.
That market for the crude oil that has been pushing prices at the pump was finally showing some weakness as crude oil prices that had spiked at $57 a barrel slipped back below $53 amid reports that fears of shortages were unfounded. United States inventories of crude oil rose for the seventh straight week, offering shippers the promise of relief from rising prices that have largely washed away their best efforts at cost control.
"The only thing you can do is try to be smarter about how you flow the material and minimize the miles you use to get your goods from one place to another," said Susan Alt, president and CEO of Volvo Logistics of Greensboro, N.C.
"We've passed our absorption point," said John Mascaritolo, director of global logistics at NCR, which has seen its air carriers in its mostly international shipping raise fuel surcharges twice in the past month. "We're going more to ocean and going to surface wherever we can."
For shippers, the miles were more expensive last week than they have ever been.
The government measure of the national average price for diesel hit $2.249, a slight increase over the previous week and the second straight weekly record. It pushed the price of diesel 35 percent ahead of where it was a year ago and 13 percent ahead of the national price the week of Feb. 7.
The Department of Energy's Energy Information Administration said diesel prices ranged from $2.182 in the Gulf Coast region to $2.483 on the West Coast.
The American Automobile Association pegged the costs even higher, with the average rate for diesel in the lower 48 states peaking at $2.611 per gallon in California last week. That was just a fraction lower than the price of premium unleaded gasoline, a bitter fact for truckers since one reason industrial vehicles have used diesel is that the fuel generally has been significantly cheaper than regular gasoline.
But strong demand and weaker production has pushed up the diesel price to the point where it is on par or even more expensive than gasoline in many areas.
The AAA's $2.304 per gallon national average for diesel was 35 percent ahead of the average price for diesel the last week of March a year ago and up about 9 percent over merely the last month.
"The independent truckers are especially hard hit," said AAA spokesman Lon Anderson. "They are the ones hard pressed to buy at wholesale prices."
For truckers, who consume an estimated 650 million gallons of diesel each week, according to the American Trucking Associations, the rising price added $572 million to their fuel bills in the past month.
At truckload carrier J.B. Hunt Transport Services, last year's higher fuel costs pushed the company's spending on the necessary commodity to $288.6 million, 24 percent more than the company spent on fuel the year before. Fuel as a share of overall costs went up from 9.5 percent to 10.4 percent of Hunt's expenses.
Most of the added costs for the carriers are being covered by surcharges, but some shippers argue those added charges come too quickly, rising with the indices but not necessarily with the real costs.
"Very few of the companies are buying (fuel) at the standard price, but they use that price to increase the fuel surcharge," said Mascaritolo. "That's the most frustrating thing. What are they doing to save on fuel? They don't tell us that. They simply come in and tell us what the price is and show us the surcharge index."
Those surcharges have grown at a double-digit rate in the last two years.
Heartland Express, Iowa City, Iowa, saw its fuel surcharge revenue grow from $5.9 million reported in 2002 to $15.3 million and then to $28.5 million last year. Heartland said in its last earnings report that operating revenue in 2004 and in the fourth quarter was "positively impacted by fuel surcharges assessed to the customer base."
Truckers say they have just about used up their traditional safeguards against higher fuel costs.
"We don't use hedging any longer," said Ira Rosenfeld, a spokesman for Overnite Transportation, Richmond, Va. "Today, hedging is not a viable option. The marketplace is just too volatile."
Like other truckers, Overnite is stepping up the intensity of its normal fuel-buying program. "We shop the market every morning, checking the price in particular areas. We have reduced the idling time of our trucks, we're doing anything we can to save on fuel consumption," he said. "But the fact is, the prices out there are higher than they have been."
"We're doing everything we can" to minimize fuel costs, said Joseph DeLuca, a spokesman for regional LTL carrier Con-Way Transportation, Ann Arbor, Mich. Idling time is minimal, he said, but Con-Way already uses an automated route optimization program that keeps driving time as tight as possible.
But some truckers also say they are starting to feel the indirect costs as customers try to rein in their skyrocketing costs with their transport decisions, opting for cheaper rail transport or going with smaller truckers who may be more flexible on the pricing.
Truckload carrier U.S. Xpress cited higher fuel costs and softening traffic in February when it warned last week that it would lose money in the first quarter and other truckers say they are concerned that the spending going towards fuel surcharges may cut into the investment that produces more shipping.
"The impact of energy costs on the economy is there," said one trucking executive.
Intermodal traffic for the railroads was up 9 percent in the first 11 weeks of 2005 after a banner year last year, although rising fuel costs are starting to hit rail operations (see sidebar above).
"You have to look at all your options," said Alt. "Fuel cost is only one of the variables. Can you consolidate LTL shipments into truckload? Can you schedule your shipments to improve the mileage?
"But that is a continuing challenge. You can schedule with a supplier, but then the freight may not be ready. You can have a lot of what let's call problematic freight. It's easy to say you need efficiencies but it's difficult to actually find them from day to day."