With fuel prices remaining at historical highs, should the U.S. government intervene and bring some relief to truckers and the overall economy? The American Trucking Associations (ATA) thinks so. In late March, the group urged President Bush to release oil from the nation's Strategic Petroleum Reserve in an attempt to rein in crude oil prices before they further constrict the U.S. economy.
In a letter to President Bush, ATA President and CEO Bill Graves wrote that relief from skyrocketing fuel prices would help the nation avoid a recession, or at least recover from one more quickly. The latter may be more likely than the former: Economic growth slowed to a crawl in the fourth quarter of 2007, and based on recent job-loss data, many economists are saying that the country already has slipped into a recession.
The ATA has made similar requests in the past, but with the price of diesel fuel hovering around $4 a gallon for several weeks, the sense of urgency in the group's petition was clear.
"We are very concerned that out-of-control energy prices will greatly magnify our current economic slowdown and delay our economic recovery," Graves said in his letter. "If households have to spend their forthcoming tax rebate checks on energy, the stimulus will be significantly limited. The more consumers spend on fuel, the less they have to spend on other goods or services."
Releasing oil from the national reserves is rare, usually occurring only during supply disruptions. The most recent example occurred in 2005, when Hurricane Katrina forced the closure of many oil refineries in the Gulf of Mexico, prompting the release of 11 million barrels of oil. The Strategic Petroleum Reserve currently holds just under 700 million barrels of oil in giant underground tanks. That's enough oil to pump 4.4 million barrels per day into the market for up to 90 days, or 1 million barrels per day for almost a year and a half. If the president should order an emergency sale of reserve oil, it could be ready for delivery within 13 days.
"Fuel costs are really hurting the trucking industry right now, so we think if you put a little more supply out there, hopefully the cost of oil will drop," says Ray Kuntz, ATA chairman and chief executive officer of trucking firm Watkins and Shepard Trucking Co.
Kuntz notes that releasing emergency oil supplies is just one of the ATA's recommendations for bringing down the cost of fuel. Others include environmentally responsible exploration of oil-rich areas in the United States that are now off-limits; development of crude resources in oil shale and tar sands in Colorado, Utah, and Wyoming; continued funding of the Environmental Protection Agency's SmartWay Transport Partnership program, which encourages fuel-saving strategies; and establishment of a national maximum speed limit of 65 miles per hour. This last effort, he says, "would save billions of gallons" of fuel.
Ripple effect
The effects of rising fuel prices will ripple beyond the trucking industry, which is on a pace to spend an unprecedented $135 billion on diesel this year—$22 billion more than last year. Historically, fuel has represented the second-highest operating expense for motor carriers, although many truckers say that fuel has now surpassed labor as their largest expense. This development ultimately will increase the cost of everything delivered by truck, including groceries, clothing, and electronics. Virtually all products consumed in the United States travel by truck at some point.
Tiffany Wlazlowski, a spokeswoman for the Arlington, Va.-based ATA, says that every one-penny increase in the price of diesel costs the trucking industry $391 million. With diesel prices rocketing up by 50 cents a gallon, the negative impact on motor carriers can't be understated. In early April, for instance, UPS, the world's largest transportation company, cut its first-quarter earnings forecast in part because of higher fuel costs.
Chris Caplice, who runs the master of engineering in logistics (MLOG) program through the Center for Transportation and Logistics at the Massachusetts Institute of Technology (MIT), notes that the ATA's request doesn't mention the fuel surcharges that shippers pay to carriers to offset rising fuel costs. He estimates that shippers paid between $67 billion and $80 billion in fuel surcharges last year, covering about 70 percent of the $113 billion that truckers spent on fuel in 2007.
"Yes, fuel is going up, and yes, it's a burden, but this is being shared very heavily with most shippers," says Caplice, who is against opening up the federal reserves. "In fact, the fuel surcharge program covers a higher percentage of fuel [costs] as the price of fuel goes up."
Ocean carriers feel the pain, too
Rising fuel prices are affecting all modes of transportation, not just trucking. The rates ocean carriers pay railroads for intermodal service, for example, are 30 percent higher than they were just a few years ago, and the fuel surcharge alone is nearing 30 percent of the total bill for that service, according to Rick Wen, vice president, business development for OOCL. Speaking at the Coalition of New England Companies for Trade (CONECT) Annual Northeast Trade and Transportation Conference in Newport, R.I., Wen noted that the bunker surcharge shippers pay covers only about one-third of what carriers are shelling out for fuel.
Add that to the fact that round-trip pricing in the trans-Pacific is 61 percent lower than it was 10 years ago, and it's clear that something has got to give. Maersk Line has "essentially gotten out of intermodal management" and has withdrawn about 30 percent of its trans-Pacific capacity, Wen said. OOCL, too, has withdrawn capacity, shifting some ships to the growing Asia-Europe trade lane. Wen warned of more hardships to come. "Oil is holding globalization hostage. ... The situation has become untenable, and at some point it becomes more cost-effective to lay up ships than to operate them at a loss."
Drayage drivers at ports around the country are finding that they must make a similar decision—try to hang on or get out of a business where rising diesel prices are eating into their already meager earnings. The drivers who haul containers between ports, intermodal terminals, and shippers' facilities are mostly owner-operators who net an average of just $7 an hour these days, said Ken Kellaway, senior vice president and general manager of RoadLink USA's New England division, who spoke on the panel with Wen. With diesel prices already at more than $4 a gallon in California and upstate New York, fuel costs are a major factor in drivers' decisions to hang up their keys. "Every single day, more of them are parking their trucks," he said.
