Rising fuel prices have become a critical part of everyday logistics. Will fuel prices continue to rise? Will fuel prices decline? Or will fuel prices level off? Those questions dominate discussions among shippers, logistics service providers, and consumers.
The impacts can be costly and wide-ranging with short- or long-term effects. What’s certain is that fuel prices are costly and taxing. What’s uncertain is that there appears to be no end in sight for the rise in fuel prices or in their duration.
In this post, we’ll look at the impacts, whom they affect, and when relief might be in sight.
To make sense of skyrocketing energy prices, we’ll start with who’s affected. Then we’ll delve into the expected short-and long-term effects.
Impacts of Rising Energy Prices on Air Cargo
After the pandemic, the logistics industry adapted to cope with a New Normal. One criterion defining the New Normal was the need for speed.
Locked up, unable to travel, or go to local restaurants, consumers found refuge online. They
began buying products online in great numbers. And this dynamic shook up the logistics industry as we knew.
It sparked a distinctive transformation in consumer buying behavior. eCommerce which had
been growing before the pandemic was now becoming a trend.
That trend resulted in the growth of consumer online shopping or eCommerce. That comes with challenges making logistics more complicated but customer-centered. Since the pandemic, explosive growth has and is changing the principles of logistics. It is influencing the New Normal where speed is a priority over cost. Hence, air cargo has seen significant growth.
Another catalyst in shifting to air cargo came from the need to relieve port congestion. Also in the post-pandemic environment, ships and containers flooded ports. The pent-up demand generated from the pandemic overwhelmed ports nationwide. This posed a problem because ports didn’t have the capacity to process this blitz of cargo.
Based on the need for speed and container overflow at ports, air cargo costs have skyrocketed. That established a trend in a greater reliance on air freight transportation.
Now, spiraling fuel prices have tamped down the shift in demand for air freight movement. That holds for the short-term. Yet it’s too early to say whether the shift to air freight movement will reverse itself in the long-run.
That wraps up a quick review of the state of air freight movement. Now, let’s review the impacts of rising energy prices on trucking.
Impacts of Rising Energy Prices on Ground Transportation
Ground transportation had issues before and after the pandemic. Those issues revolve around the perennial driver shortage and volatile fuel costs.
Concerning the driver shortage, that remains a structural issue. It will continue to hamper trucking until the industry addresses root causes. One of the root causes is pay, and a deeper one is driver benefits. Life on the road is tough. Until working conditions get resolved, the driver shortage will persist.
As fuel costs rise, that puts a pinch on driver pay for independent truckers. It also puts a squeeze on profits for trucking companies. Transportation costs reflect 10.4% of total revenue (2019 Annual State of Logistics Report). So when energy costs rise, drivers and businesses experience the effects almost immediately.
What’s driving fuel costs higher is no secret. Western sanctions against Russia, the world’s number two crude oil producer have upset oil markets. Russia was producing 10.5 million barrels per day. Because of the war, production has declined and the removal of what production is ongoing is enough to jolt the supply of oil. That oil shock has and continues to provoke the spike in prices.
Rising energy costs show no end in sight in the short- or medium-term. It’s too early to tell whether high energy prices will plague businesses and consumers in the long-term. Regardless, higher fuel prices will have a negative effect beyond transportation costs.
In particular, delays will occur in the shift to green technologies. Attaining Net Zero carbon and implementing renewables will take longer than planned. That’s because they are costlier than “dirty” fossil fuels. Like air and ground ocean shipping is also seeing record high fuel prices.
Impacts of Rising Energy Prices on Ocean Freight
According to OECD, ocean shipping moves 90% of all traded cargo. That has not changed much, and it does not appear that would change in the future. Globalization has cemented that shipping dynamic.
As businesses pursue on- and near-shoring, we may see a reduction in sea-borne shipping. But any reduction would only be marginal. Shifting sourcing takes time. And there are many other opportunities to ship cargo on waterways.
Transportation costs are about double what they were a few years ago. And those costs are being passed on to shippers and consumers. Thus, we’re seeing inflation increase, and it does not appear to be transitory.
Fuel costs comprise between 50%-60% of shipping costs. When fuel costs spike, as they have, their impact will be readily felt in the supply chain but not easily absorbed. They affect demand and reduce the need for ships and containers.
This reduction will lead to reduced revenues and profits. That means less money for R&D, plant and equipment, people, and innovation.
Impacts of Rising Energy Prices on Rail Transport
As incoming cargo backlogged ports, moving cargo out of ports full tilt became a top priority. To ease these unprecedented backlogs, industry stakeholders employed all means of transportation.
The use of rail experienced a surge until its capacity reached maximum levels. So, rail prices increased with fuel prices and increased demand.
Now, the trend towards increased use of rail transport has leveled off. Inflationary pressures, along with rising oil prices, have lessened demand. Also, shipments for China have declined because of a resurgence of Covid. This combination of factors has curbed the modal shift from rail to ground transport.
Although rail has the lowest shipping costs, it lacks the flexibility of trucking. So, as rail costs rise, rail becomes a less favorable shipping option compared to trucking. Rail on its own is an incomplete solution. That’s where internodal comes into play.
But rising energy prices undermine intermodal transportation, too.
Impacts of Rising Energy Prices on Intermodal Transportation
It is obvious that fuel prices have had an adverse effect on intermodal transport costs. Internodal consists of a combination of two or more of these: air, ocean, road, or rail.
Because of the pandemic supply chain dislocations, companies reconfigured their transportation networks. They developed new, efficient routes while employing an optimal mix of transportation modes.
One of those initiatives was the movement of cargo further inland. Transporting containers to the interior of the country for off-loading relieved port congestion. It also helped to reduce extended delivery times caused by port congestion. It wasn’t uncommon for containers to sit for weeks unattended.
Thus, we saw a new trend in the making. But that modal shift now only appears to be temporary as rail capacity is at or near its maximum. And rail transport prices have also climbed.
The rise in fuel prices has broadly affected transportation costs and operations. Today, businesses find themselves squeezing even more efficiencies out of supply chains.
Impacts of Rising Energy Prices on Consumers
Regardless of mode, the rise in fuel prices has had an adverse effect on transportation costs,. At the center of it all are consumers. Their costs are rising, weakening demand.
Whether we experience a sizable demand reduction in the short- or long-run remains open to debate. It could lead to stagflation or even recession. Either would have dire consequences for consumers, the logistics industry, and the economy.
Many factors influence a resolution to the current situation. The Russo-Ukrainian War, the breadth, depth and longevity of U. S inflation. And the Federal Reserve’s policy responses toward interest rates. There’s more. But this illustrates the level of complexity involved in managing a soft landing.
In the end, your business will have to manage a delicate balance. You must manage transportation, logistics, and distribution with your customers’ needs in mind. And you must do this at a profit.
Taking Your Next Steps Can Lead to Success with the Right Partner
As energy prices continue to rise, you must understand the impacts and how to neutralize them. Rising oil prices have a myriad of direct and indirect effects. Understanding the market environment is a first step in surviving.
The next step comes with withstanding and leveraging the impacts on your benefits. Since logistics comprises a large percentage of the cost of your products, working with an accomplished 3PL would benefit you.
When you partner with a 3PL, you can focus on your business, while your 3PL partner handles the logistics.
American Global Logistics is an accomplished 3PL with successful and satisfied customers. We’ve worked through lean and prosperous business cycles. We’re no stranger to operating in times of rising fuel prices. It’s difficult but not unmanageable.
Contact American Global Logistics to learn how we can help you thrive in today’s demanding environment.