ICAT Blog: Article Running on Fumes: How Fuel Prices Impact Logistics

It’s no secret that fuel prices have seen a dramatic increase from just one year ago today. You know how this personally impacts you on a daily basis, but have you thought about just how it impacts the logistics and transportation industry? You may be surprised at the drastic ripple effect it actually has on the economy.

What are some of the impacts when oil prices rise?

When oil prices rise, it ultimately creates an outward domino effect which begins with the freight carrier (i.e., trucking company, airline, cargo ship). The freight forwarder who is routing the freight will have to absorb these costs, which will then be passed along to the shipper. If the shipper is being charged more to have the freight transported, the consignee (receiver or end customer) is going to be charge even more to make up for the added costs.

(Do you see where we’re going with this?)

Then, when the product hits the shelves, they will be sold to consumers at a higher cost to make up for the inflated transportation and fuel costs. This basically means higher fuel costs ultimately cause product inflation and affect every aspect of production and transportation along the way.

In addition to increased transportation costs and product inflation, some carriers will change their service areas. Each mode of transportation has an ideal service area, and when fuel prices increase to a certain level, carriers can take a huge hit to their overhead costs. This means service areas they generally pick up from or deliver to could change until fuel prices decrease, leaving some options unavailable for freight forwarders to utilize for their customers.

What happens when oil prices fall?

Not that we currently feel like we’ll ever see the light at the end of the tunnel, but when oil prices fall, the opposite generally occurs. The demand for shipping services rises as the fuel prices decrease. The savings on freight costs can then be passed onto the consumer in the form of lower product prices.

How do logistics companies adapt?

Fuel prices are constantly changing, and the volatility of the market always keeps the logistics and transportation industry on its toes. When fuel price fluctuations occur, logistics companies tend to act in several areas to minimize the overall risk.

• Discuss various logistics solutions with their customers;
• Work with their vendors on fuel surcharges;
• Focus on their internal operations; and
• Find efficiencies to enhance their service levels.

Resources:

• Effects of High Fuel Cost on Logistics (LinkedIn)
• Four Implications of Rising Fuel Costs to Freight Transportation (DDC)
• Impact of Fuel Prices on Logistics (Mansfield Energy)