When fuel prices increase, trucking feels the pain. It hurts a lot lately.
“Fuel accounts for the second-largest fleet operational cost behind payroll — for small dairies as well as national for-hire carriers,” said Scott Susich, senior vice-president, supply, of the American Petroleum Exchange. He addressed the 2001 Dairy Distribution Conference in Orlando. In the session, Susich outlined strategies for better fuel inventory management and purchasing.
Costs are soaring. Compared to a year ago, the wholesale price of diesel fuel in selected cities across the United States has increased more than 20%, Susich said. “A year ago, the rack price of diesel in Atlanta was 73 cents a gallon. In January 2001, it was 90 cents — almost a 24% increase.” (The national average rack cost of diesel the week of May 14, 2001, was $1.21, according to OPIS Energy Group, which publishes a third-party fuel price index. The OPIS website is www.opisnet.com.)
Following the wholesale market, retail prices of gasoline also continue to increase. In Newark, New Jersey, it increased 15%; in Houston, 22%; and on the West Coast, almost 30%. “When dealing with such a large expense, and costs fluctuate 20% from one year to the next, obviously it's an important topic that probably needs better ways to manage it,” he noted.
Of course, fleet managers know that prices are volatile, Susich said. Prices are subject to many factors — supply and demand, weather, politics, wars, and the Organization of Petroleum Exporting Countries.
“We saw crude oil prices fluctuate by $23 a barrel during the Iraqi invasion of Kuwait,” he said. “In August 1990, oil prices went through the roof. And although the government is always good at pointing the finger at big oil companies, it is interesting to note that during the Iraq-Kuwait ordeal, the federal government raised the fuel tax five cents a gallon. Prices skyrocketed. The following spring, it was clear this war was over, and prices plummeted by $21 a barrel.”
During the middle 1990s, Asia experienced hard economic times. Demand in Asia dropped significantly, causing prices to fluctuate in the US.
“The economy really started to collapse in the last couple of years,” Susich said. “In response to that, the price of oil got so low — dropping from $23 to $10 a barrel — that OPEC felt the squeeze. They decided to turn off the spigot and stop the flow of crude oil. That caused oil prices to triple, from $10 to nearly $30 a barrel.”
Cost Change Impact
The impact of these cost fluctuations has been great on dairy fleets as well as the whole trucking industry, he said. The retail price of diesel averaged about 90 cents a gallon a few years ago; the average today is about $1.60. The national average retail diesel price the week of May 14, 2001, was $1.57, according to OPIS Energy Group.
Though fleets can't control fuel markets, they can take steps to manage fuel purchases better. An understanding of the components of price may help in this process, Susich said. For example, if the retail price of diesel is $1.54, about 74 cents of that is for the crude. Additional costs include transportation to the refinery by pipeline or truck, refinery overhead, and refinery profit margin.
“Fleets can't do much about crude and refining, but if they are a large enough consumer, they can jump in at the next line item, the pipe tariff, and start to have an impact on the price,” he said. “Long-haul fleets with facilities throughout the country may cut costs by buying fuel in different spot markets.”
The US has five major spot markets — New York harbor, Chicago, the Gulf Coast, Group III Mid-Continent, and the West Coast. The Gulf Coast market reaches all the way to New Jersey, because of a pipeline that runs through the Southeast. Group III of the Mid-Continent is centered in Tulsa, Oklahoma, and fans out over the Central Plains, to Chicago, and the Rocky Mountains. The states west of the Rockies are in the West Coast spot market. Pipelines east of the Rockies don't go west.
“Things happen in these different markets that don't happen in others”, Susich said. “The West Coast may completely blow out, with prices jumping 25 cents. Meanwhile, operations in Chicago may see prices drop. That's because a different set of economics applies in each case. The West Coast is sort of an island isolated by the lack of pipelines.”
The spot market is the least expensive place to buy fuel, because many downstream costs, including transportation, are not included in the price. In the oil industry, downstream refers to everything that happens from the refinery to the retail pump.
“The spot market is priced at the refinery,” he said. “But it requires large buys, basically a million gallons at a shot. The buyer is responsible for downstream transportation. A lot of big trucking companies buy on the spot market and ship through a pipeline. They may also ship by barge or rail.”
Wholesale Market Factors
Buying on the spot market may not work for many dairies. The next best bet is to buy fuel at wholesale, rack, or terminal pricing. Rack price incorporates refining and spot market costs, including transportation.
“Of course, wholesalers markup the price,” Susich said. “But aside from retail, the advantage of wholesale is buying in small quantities. Some wholesale terminals allow purchases as small as 3,000 or 4,000 gallons. A 4,000-gallon purchase is about a half tank load. The purchaser is responsible for transportation.
“Wholesale locations can be found throughout the US. Look for patterns that help aggregate and concentrate purchases. Buying from one supplier at one terminal may help negotiate a better deal, compared to buying on a load-by-load basis at various locations.”
Wholesalers offer variable-price and set-price programs. Instead of agreeing to a variable price that is discounted a few cents below retail, fleets should consider a cost-plus program, Susich said. “For instance, agree to pay a seven-cent margin,” he said. “This beats taking a three-cent discount from retail when the supplier is four cents higher than anyone. Check weekly indexes published by OPIS and other third parties that report the wholesale prices.”
Set-price or fixed-price programs provide security for fleets that calculate an assumed cost of fuel in annual budgets. For instance, a fleet may decide that a per-gallon price of $1.25 or less is an appropriate projection. Obviously, the risk is that the market will go down to 80 cents. In such a case, a fleet that has locked in an annual price of $1.22 is in for a scare, Susich said.
Retail Market Factors
Retailers also offer variable- and fixed-price plans for purchasing in increments less than 42,000 gallons. A distributor that purchases in 10,000-gallon increments may be included with several others in a single purchase contract. “Good retail programs exist,” Susich said. “A lot of fleets think they need to get their own fuel tanks and buy at wholesale, but that may not be true.
“For example, I worked as a consultant for a large LTL carrier that operated multiple terminals and 3,000 fuel tanks across the US. We broke down the economics of owning those tanks and discovered that it cost the carrier $3.86 cents a gallon to fuel trucks. We factored in the cost of the tanks, depreciation, labor, refueling time, and environmental insurance. Out of those thousands of tanks, only 40 were profitable. The gauge of profitability was whether the carrier's cost was less than buying at retail.”
Fleets that buy at retail and don't have their own tanks avoid environmental risk, costs of leak detection and other environmental rules, direct labor costs, and insurance costs, he added.
Setting up a retail network can be an effective strategy. The first step is to consider where to buy fuel, how to pay, and what other services to buy. “For example, aggregate purchases through a station chain owned by Bob. Tell Bob that the fleet is purchasing about 18,000 gallons a month from his facilities,” Susich said. “Then try to negotiate a cost-plus deal. For instance, agree to cover Bob's costs based on a third-party publication, plus a six-cent pumping fee.”
Other options are available from fleet card companies. These companies supply cards to drivers and also provide management services that fleets may not be able to do for themselves. Some companies send only one statement a month, combining all purchases. They also provide fuel consumption information keyed to vehicle numbers, data on where trucks fueled, and odometer readings.
“Buying at retail locations that make sense can aggregate enough volume to negotiate,” Susich said. “I recommend doing it on a wholesale basis, because the retail price is whatever the station owner wants to charge. For example, a three-cent discount at a station that is always four cents higher than everybody else doesn't gain anything.”