March 11, 2022
While Putin’s war is in Ukraine, the impact is hitting close to home. Oil prices have soared over the past week which means filling your tank will cost .75 cents more a gallon, according to the US Energy Information Administration (EIA). As of March 7, 2022, diesel fuel prices to 4.85 per gallon depending on where you are located across the country. Those prices have likely not peaked and may be here for the unforeseeable future. However, it is not oil from Russia that is causing the price hike so Biden’s decision to sanction imported oil from Russia is not the reason prices are higher at the pump.
According to Aljazeera, dated March 3, 2022, Russian oil exports account for 8% of the global oil supply but only three percent for the US and one percent of the total crude oil processed by US refineries. By contrast, the US imported 61 percent of its crude oil from Canada, 10 percent from Mexico, and six percent from Saudi Arabia in the same year. So, why is the impact so severe? Chris Lee, VP of marketing for ProMiles, said he believes the increase is due to panic for the uncertainty of how much the retailer’s next resupply will cost.
While diesel retailers are paying more for their fuel, Chris Lee, vice president of marketing for ProMiles, said he believes a lot of the increase in retail diesel prices is in panic due to the uncertainty of how much retailers’ next resupply will cost them. I attribute a lot of it to a panic syndrome, Lee said. There’s so much uncertainty, and people are jumping as far as they can to the side of caution.
The rise in fuel costs is based on the volatility of the market from the sanction and the global need for fuel. According to the US EIA, Russia is the third-largest producer of petroleum after the U.S. and Saudi Arabia, exporting almost 5 million barrels a day of crude oil in 2020. Almost half of those exports went to European countries, while 42% went to Asia and Oceania.
Sanctions are not just imposed by the US. As a leading exporter, if Russia can’t sell, then the price of petroleum and crude everywhere increases (and has substantially). Those European countries who are reducing the use of Russian oil have to find it somewhere and they’ll need to compete for the supply. So, as Chris Lee suggests, it is panic at home but also panics across the globe.
Adam Pankratz, a professor at the University of British Columbia’s Sauder School of Business told Aljazeera the following:
If the US stopped importing Russian oil, that would mean that likely many other countries would also no longer be importing Russian oil, and that would make a very tight oil market already much tighter, and that would drive up the price of oil and that in turn can drive inflation, which in turn can affect the US economy, Adam Pankratz
According to the US EIA, California is paying the most for diesel at $5.759 per gallon. The Central Atlantic region follows closely at $5.093 per gallon. The Rocky Mountain region shows the lowest price at $4.542 per gallon, followed by the Midwest region at $4.649 per gallon. EIA regional prices are as follows:
1. New England – $4.815 2. Lower Atlantic – $4.919 3. Gulf Coast – $4.703 4. West Coast less California - $4.978
According to AAA, as of the first week of March, diesel fuel prices in the Pacific Northwest are as follows:
1. Idaho: Avg. $4.702 2. Washington: Avg. $5.046. 3. Oregon: Current Avg. $5.096.
Adapting to the conditions is a must when it comes to trucking and transportation and a lot of companies are doing just that. Restructuring schedules and operations to make a profit is critical sooner than later since fuel prices are not likely to fall. But what does it mean to adapt? Here are some examples:
- Retain more inventories - Reduce services where they are not profitable - Consolidate trips where possible - Change your service area - Larger bulk shipments can be more efficient than frequent smaller shipments
These examples are not always the best solution because while the cost of fuel might be more efficient the efficiencies in logistics might be further impacted negatively. The typical model relies on more trips on scheduled routes to drive profitability, and a decrease in shipment frequency increases the number of empty miles driven by a carrier. Savings all depends on your company and the efficiencies that you can find in both the cost of fuel and profitability for your operation.
Trucking companies need to be proactive and realistic about the situation. Analyzing the cost of operations across the entire company might be a strategy that will balance out the cost of diesel in the months to come. We need to control what we can and adapt to the circumstances that we can’t control.