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Crude Oil prices are dropping, nobody is sure where they will bottom out, but everyone is seeing the effect at the gas pump as the price per gallon on the average is about 60% of what it was a year ago (January 2014). Diesel prices are experiencing a similar drop, so the question is: How much will over-the-road shipping costs drop in 2015?
To get some perspective one needs to understand the effect of crude oil on the truckers cost.
Below is a chart bases on data from eia.gov website-which is the US energy information administration.
As one can see from the above chart, Crude Oil makes up about 50% of the total costs of diesel fuel on the average.
Below is a chart based on data attained from a 2012 analysis of Truckers operational cost by Glostone Trucking Solutions http://www.glostone.com/. The exact report can be downloaded at: http://www.glostone.com/wp-content/uploads/2012/09/ATRI-Operational-Costs-of-Trucking-2012.pdf
Based on the above chart, one can see that fuel makes up about 35% of the total operation costs of an average trucker. So if the cost of crude oil drops by 50%, then the total cost of diesel would drop 25% and this should reduce the trucker’s operational costs by 8.7 %.
So does this mean that shipping costs should be 8-9% lower in this scenario? Probably not as there are many more factors to consider. First of off all shipping prices are a market based decision, certainly a large influence on that would be operation costs but we seldom see end use prices 100% correlated to supply costs. Otherwise we would see plane ticket prices and baggage carry on fees change dramatically – so far they have not.
Another factor to consider is that while fuel makes up a significant part of the truckers cost, there are other factors that drive overall cost, most notably drivers wages and benefits which add up to 35.81%. Many are predicting that labor costs will increase significantly in 2015 because of a shortage of drivers. See our posts on trucking costs over the next five years. Also as the economy heats ups and demand rises, prices could actually increase if there is a shortage of trucking capacity.
It appears that short term, many believe that oil prices will continue to drop. A recent article in MSN money claims that the price of oil could hit ridiculously low prices, Source.
Kiplinger came out with an article that claims that oil prices won’t go above $90.00 per barrel, but predicts that shipping cost will increase:
“Despite lower fuel prices, figure on higher trucking and rail freight rates. With the economy revving up, there’ll be more cargo moving on highways and rails, spurring demand for trucks and train cars and bumping shipping rates higher. Trucking—up about 6% to 7%, largely because trucking firms will hike pay to hire the drivers they’ll need to handle the expected increase in shipments.” Read more at http://www.kiplinger.com/article/business/T008-C000-S000-business-costs-in-2015.html#CbOmXVxzv6drOFug.99
According to one source we have in the freight forwarding business, trucking prices have not dropped very much so far, and is not seeing any signs that they will drop significantly in the future.
So while fuel prices may go down and it does appear to affect about 17% of the total costs; there are dynamics in the shipping industry that will have a much larger affect on prices than fuel. The cost of labor and supply and demand dynamics will have a much bigger impact on shipping prices than fuel costs.