Crude oil is edging toward the $70 per barrel mark and diesel prices are at all-time highs and yet large carriers are reaping the benefits of tight capacity and growing freight volumes-- with some touting record profitability in the second quarter. This begs the question how much more of an energy price climb can the economy withstand before there is a downturn.
“By and large, we’ve been able to pass the fuel surcharges on,” Steve Russell, Celadon group chairman & CEO told Fleet Owner. “But I think the broader question is why hasn’t this slowed down the economy and at what point will it?
“What’s happened is that our economy has become global. For example, every T-shirt is not made in North Carolina, it’s made in China,” Russell continued. “These energy price increases are being offset by the fact that imports have kept inflation low.”
Producer prices for finished goods in July have increased an unadjusted 4.6% compared to July 2004, according to the Bureau of Labor Statistics. But in July it increased an unadjusted 3.2% compared with the same month last year. Excluding food and energy, consumer prices rose only 2.1%.
Chris Brady, president of Commercial Motor Vehicle Consulting, concurs that cheap imports have kept prices at bay.
“Competitive pressures in China have forced U.S. producers to keep tighter controls over their costs,” Brady told Fleet Owner. “That has certainly stemmed inflation. But somewhere along the line even a U.S. producer can’t make a product at a loss. But there’s no doubt that foreign competition has put downward pressure on domestic companies.”
The U.S. economy is starting a new trend by continuing to grow despite bloated energy prices. That wasn’t the case when spikes in energy costs in the ‘70s and early ‘80s caused massive inflation, Brady noted.
“The relationship between higher oil prices and an upturn in inflation doesn’t appear to be as strong as we’ve seen in the past,” Brady said. “It could be because of foreign competition, or because we’re not as reliant on certain oil producers as we were 20 to 30 years ago.
Low interest rates, easy credit and rising housing prices also seem to have played a role in sustaining spending, as this has allowed consumers to tap into home equity loans, Brady added.
“I thought when crude hit $40/barrel, and if it were to hit $50, that’d be it,” Russell said. “But energy prices so far haven’t had an impact on freight. U.S. unemployment levels are at the lowest in some years.”
West Texas Intermediate crude oil traded for above $40/barrel for the first time since October 1990 on May 2004.
“It’s surprising that the economy hasn’t slowed down significantly,” said Brady. “By this time (since oil prices have spiked) you’d expect to see more signs of a slowdown in the economy.”
But with diesel prices breaking the $3 level, particularly in California, even larger carriers that had recently reported gangbuster profits have some cause for concern, cautioned Brady.
“Today we have too much freight in relationship to trucks,” Brady said. “That’s why it’s not the carriers’ fuel surcharge strategies that’s working, it’s the freight environment today compared to other periods. This always turns around because it’s always a cycle.”
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