For much of the shipping world right now, the skyrocketing price of oil is an enormous and very expensive game of musical chairs. As long as the music plays, carriers will pass the bloated cost of fuel on to their shippers, and shippers then try to pass it along to their customers or to recover the costs at the negotiating table.
What a growing number of players fear, however, is what will happen when the music stops.
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Higher fuel prices are "going to have a devastating impact on our overall economy," said D. Paul Thompson, CEO of freight consultancy Transportation Insight. Shippers' day-to-day operational worries about the price of diesel are being replaced by generalized anxiety about the future of the economy.
"This is the most concern about fuel prices that I've seen since the oil crises of the late 1970s," Thompson said.
That concern comes from the highest numbers ever recorded, even adjusted for inflation, for the price of oil and record highs in recent weeks for diesel fuel.
Before a sharp pullback last week, the price of oil on world markets pushed past $98 a barrel, capping a sharp run-up in recent weeks that has brought the prospect of $100-a-barrel oil into the limelight and, more immediately for shippers and transport carriers, pushed diesel fuel prices to record levels.
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The national average price of diesel jumped 12.2 cents for the week ending Nov. 12, to $3.425 a gallon, only a week after the price spiked 14.6 cents. The average on the West Coast surpassed $3.60 a gallon and in California it was $3.663 a gallon, according to the U.S. Energy Information Administration.
In three months, the average national price of diesel has grown 64 cents, or more than 20 percent, and the price has increased 42 percent since February.
Jet fuel prices also have soared to new records, growing some 60 percent this year and pushing past $2.70 a gallon on some world markets at the start of November and fuel surcharges for air transport were hitting record levels this month.
Oil, of course, is the grease that makes the wheels of global commerce spin, at the rate of 85 million barrels a day. "Oil is it," said Eric Starks, president of FTR Associates, a research group. Shippers and carriers "are just going to have to deal with it," he said.
The price of oil has risen 56 percent this year, and 365 percent over the last decade. "We snickered at $70" per barrel oil, said Jack W. Boisen, vice president of cargo at Continental Airlines Cargo. "We coughed at $80. We gasped at $90."
With the huge runup in energy costs this year, you might think shippers and carriers would be pressing for a national energy policy to deal with it, or hedging strategies to anticipate it, or alternative fuels to bypass it. But experts say the rising costs this year haven't yet raised the alarms and actions that came when spiking fuel costs hit transportation three years ago.
"By and large, the shippers have been oblivious to really doing any kind of scenario planning," said Michael A. Regan, CEO of TranZact Technologies, a logistics management provider. "People are acting as if (the higher fuel price) is being discussed, when in fact it's a reality now."
"We're not seeing the big panic you saw three or four years ago, and the main reason is most shippers have been seeing a pretty healthy reduction in their transportation line haul rates," said Gary Girotti, vice president of the transportation practice at supply chain consultancy Chainalytics.
That's because the freight economy has been in recession for more than a year and nearly every mode is scrambling to keep equipment filled and stock rolling. "If we're sitting in this situation six months from now, it's a different story," Girotti said.
"People are taking a wait-and-see approach because transportation budgets look pretty flat right now," he said. "If oil remains this high at the end of the first quarter (of 2008), if we continue this trend, then you will see some response."
Since the gallon prices of gasoline and diesel don't move in lockstep with the price of oil by the barrel, oil's price is still a relatively abstract measure for many shippers. "The oil prices had been up 30 percent and the diesel prices were up only 18 percent," Girotti said, while noting the spread between oil price hikes and diesel fuel increases has recently narrowed.
Most shippers are also better insulated from the direct costs of oil and fuel. Diesel averages about 4 percent of a shipper's total logistics cost, according to Girotti.
But shippers say the recent increases are breathtaking. "We've just deadened the senses," said Gary A. Palmer, senior transportation director at hardware tools shipper True Value. "Each year it's another plateau, and we've lost our ability to be shocked by it."
With carriers hungry for freight, the surcharge has become the prime battleground between shippers and carriers over who ultimately pays the increased price of fuel.
Bigger carriers that pass through fuel costs report the least impact to their businesses. "We have not seen any evidence that the higher fuel prices are impacting our volume to any greater degree than previous," said Jim Butts, vice president of transportation at freight broker and logistics provider C.H. Robinson Worldwide.
C.H. Robinson tries to mitigate the impact on its carrier partners and customers by expediting surcharge payments.
Others also are looking more closely at operations. John Deris, senior vice president of sales for fleet management solutions at Ryder System, said his company is leaning hard on technologies that monitor driving habits, idle times and onboard diagnostics to optimize vehicle performance. "There are many ways of lowering overall fuel costs other than just price per gallon," Deris said.
Big companies such as Target, the $60 billion retailer, continue to rely heavily on their surcharge program to keep a lid on fuel costs. "However," said Steve Carter, Target's director of transportation planning, "we always look to move as much in full truckloads (versus less fuel efficient LTL) whenever we can."
For much of the trucking industry, fuel surcharges are a growing point of stress between shippers and carriers as fuel costs look increasingly out of step with pricing and surcharge programs built into contracts.
Carriers say with some fuel surcharge programs locked into the single digits even as costs have grown more than 20 percent, the financial health of some carriers is threatened. Steve Hartmann, vice president of Aurora, Ill.-based LTL carrier Mid-States Express. "At some point," he said, "that's going to cut you out."
"Most carriers have a floating surcharge," Hartmann said. "But some (shippers) top out at 8 or 9 percent. At some point, when your revenue is not covering your fixed costs and not covering your variable costs, well, we heard (YRC Worldwide Chairman) Bill Zollars say the other day, YRC is going to have to fire some customers. That's the reality the industry faces."
Starks said savvy shippers realized after an earlier run-up in fuel prices in 2004 and 2005 that shopping purely on cost was a fool's game over the long run. "You want to make sure (carriers) are there for you," he said.
Hartmann agreed. "When the economy comes roaring back, where shippers had 20 carriers, they are going to have five. And shippers aren't going to know what hit them," he said.
But carriers also are under enormous pressure to keep their vehicles moving for cash flow even if the business loses them money longer term. "It's the quick death or the slow death," Hartmann said. "Which one do you want?"
Shippers seem to tolerate more transparent truck company surcharges than those from other modes.
"The fuel surcharge is better managed in the truckload world," said Harold A. Wilson, president of distribution and transportation services at closeout retailer Big Lots.
"With the rail industry and the way it assesses fuel surcharges, we have a much more difficult time understanding the reasonableness and the way it's passed along to us," Wilson said. "In the last two years, we've seen much more of an increase in the fuel surcharges in the rail industry than in the trucking industry."
Greg O. Andrews, managing director of the executive masters in international logistics program at the Georgia Institute of Technology, said international investigations into surcharge price fixing, involving most recently British Airways and Korean Air in the United States, suggest "fuel surcharges are being used to pad revenues."
If there's one player no one so far wants to deny a seat in this game of musical chairs, it's the consumer.
"What we're hearing is a strong sentiment from our shipper base that now is not the right time to pass higher fuel prices along to consumers," Butts said.
Deris added shippers "are concerned about economic conditions right now. They're all tightening their belts."
Instead, shippers are trying to squeeze those last molecules of efficiency out of supply chains that have spent the last decade on a productivity bender.
"The marketplace we're in is very mature," said Thompson. "The players are very efficient. There's just not many things meaningfully that can be done. You can put more stuff on rail but you pay on efficiency, especially in the just-in-time world and with customer service demands."
Palmer said True Value is looking beyond the efficiency drives of recent years. "If we can move to 6.4 miles per gallon from 6.2, that can provide a major savings," he said.
"We were concerned about hours of service and how that would require us to save time on the road," Palmer said. However, an internal study at one site, for instance, "showed drivers that setting a speed of 62 miles per hour turned out to be safer, saved fuel and made very little difference on time of arrivals," he said.
And, Palmer said, "We avoid buying diesel on the road, buying retail, and that means driving smarter and planning."
Regan said fuel hedging by locking in prices for future supplies was a popular topic of discussion six months ago. Now, after the price began its nine-week autumn run-up to more than $90 a barrel, not so much.
"Your timing has to be right," Regan said.
The biggest, most sophisticated buyers are the only ones reporting consistent hedging success: Deris said Ryder buys 30 million gallons of fuel a month and can cut deals for major nationwide accounts.
But even oil company executives are baffled by the amount of money being shelled out for a gallon of diesel. "The fundamentals don't support where prices are today," said Todd W. Onderdonk, senior energy advisor for ExxonMobil. "Nobody was projecting it would be this high."
It's increasingly taken for granted that high fuel costs will eventually exact their inflationary revenge throughout the broader economy. "The higher fuel prices put pressure on everybody who's responsible for supply chain costs," Butts said.
Yet Starks argued the ongoing freight recession and excess transportation capacity are more responsible for temporarily switching the balance of power from the carrier - where it was a few years ago when business was booming - to the shipper today.
"It's definitely flipped," Starks said. "The fuel situation is not longer a primary driver of whether the industry is profitable or whether the industry will be around." As lousy a mechanism as the surcharge is for catching carriers up to rising fuel costs, the absence of that mechanism put hundreds of carriers out of business during the last freight recession, in 2001 and 2002.
"Nobody wins with $100 oil," said Thompson, "at least not in the shipper-carrier community."
Associate editors John Gallagher and Michael Fabey contributed to this story.