We're currently getting a lesson in how consumer spending can increase without a corresponding increase in freight traffic. It's also known as the economics of inflation.
In this case, we're talking about the rise in fuel prices. We're beginning to get a picture of what things will look like during the summer months, and the news is not good. Crude prices are heading for $75 a gallon, which will push the cost of gasoline and diesel up regardless of proposed changes in fuel formulations. Market speculators will continue to keep upward pressure on all forms of fuel, which means everyone will be spending more on this commodity. But it won't result in any higher freight levels for carriers.
The pump price of gasoline will likely hit $3.15 per gallon this summer, with a corresponding decline in consumer spending on non-durable goods, especially clothing and recreational services. Since consumers' disposable income, adjusted for inflation, has not risen significantly in more than a year, they have to keep spending levels pretty constant.
Under this scenario, as the price of something increases, the level of demand for it will generally decrease. However, both the increase in price and the basket of goods demanded is not uniform across all income groups. The hardest hit are those in the bottom third of the income stream.
A one-car family, for example, now pays about 87 cents more for a gallon of regular fuel and 80 cents more for a gallon of reformulated regular than they did in 2003. On the surface, it looks as if buying reformulated fuel would have been a better move. But that's not necessarily the case since it costs between 8 cents (2006) and 14 cents (2003) more per gallon than standard regular.
Since we are moving to only reformulated gasoline in the future, we can expect the 8-cent differential to hold. Thus, the difference in a gallon of regular in 2003 and reformulated regular today is about 92.5 cents per gallon. At 20,000 miles per year and 12 mpg, the average consumer is spending an additional $29.65 per week. That's an increase of more than 60% since 2003.
Consumers are faced with several choices if they want to cut back on fuel expenses. They can reduce the number of miles they drive, which may be difficult considering they have to get to work. They can carpool, assuming they're not doing that already. Or, they can cut back on purchase of other goods and services, which often means switching to lower quality items.
In any case, the vast majority of people had to take about $1,500 a year, per vehicle, from some other budget category and move it into fuel expenses. Within a matter of months, it is expected these same fuel prices will rise another 60 cents per gallon, causing another diversion of nearly $20 per week.
Without wage gains in excess of overall inflation, and by at least 2% for at least two years, the average consumer won't catch up. They'll have no choice but to cut back on other goods, creating a situation where consumer spending increases, but freight traffic does not.
Since 2002, highway diesel has increased by 76% on a cost-per-mile arithmetic average. And now the specially formulated ultra-low-sulfur diesel (ULSD) is about to hit the market. Current estimates put the cost increase associated with ULSD in the ballpark of the differential between regular and reformulated gasoline. In addition, compliance, delivery, and monitoring costs will add to the overall higher costs tied to ULSD.
I assume that most small carriers still do not have fuel surcharges in place. Look for major fallout later this year, since they don't have the ability to divert consumption from other costs of doing business.