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Effects of Fuel Costs on Logistics

Historical graph of fluctuation in fuel prices
Via macrotrents.net. Click here for an interactive crude oil historical price chart.

Price fluctuation in the market for fuel has a constantly evolving effect on the logistics industry. Rapid increases in the price for fuel can have a delayed and devastating effect on freight management companies, and a sudden fall could result in short-term boosts in profit and a surge of competition within the market to provide consumers with the lowest price. 

When Oil Prices Rise

As the cost of fuel rises, carriers are forced to raise prices or take losses. In turn, the cost of fuel does not only effect the logistics company, but also the shipper and the profit source of the shipper as well. It is an outward domino effect: If it costs more for the freight carrier to transport the freight, the shipper is going to be charged more to make up for this. If the shipper is going to be charged more to transport the freight, the receiver is going to be charged more to make up for their added costs.

The preferred means for transportation shift as it becomes less and less economically viable to move freight using fuel inefficient methods relative to the market. For instance, if the cost of rail usage is low and fuel costs are high, a logistics company may ship more freight via intermodal carriers than over the road trucks

This means the products are going to be sold to consumers at higher costs to make up for the higher transportation and fuel costs. Basically, higher fuel costs cause product inflation, and affect every aspect of production transportation along the way.

The bottom line: higher fuel costs means a higher price passed on to the consumer.

When Fuel Prices Fall

When the cost of fuel falls, the reverse generally applies. The savings are passed on to the consumer in the form of lower prices, as expected. Demand for shipping services rises as the cost decreases. Sales and profitability get a boost and encourages growth. Logistics companies who provide the greatest cost savings can redirect efforts from mitigating the high costs of fuel to working to increase the speed of service and improve other aspects of their operations.

The bottom line: lower fuel costs means a lower price passed on to the consumer.

3PL Companies Must Adapt to Fluctuations in Gas Prices

With the continual volatility in the price for crude oil, logistics companies are forced to restructure or strategize their operations to ensure continued profit, and avoid any potential setbacks. The effects on the logistics industry and the rise in freight transportation costs have caused some companies to start keeping more inventories on hand, minimizing the amount of transportation necessary. Less often, larger bulk shipments can be more cost effective then frequent smaller shipments. This may save the shippers and receivers money, but causes yet another negative impact on the logistics industry. Lack of shipment frequency increases the number of empty miles driven by a carrier. The more stops a carrier can make in a given route the more profitable the trip.

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Fuel Costs Logistics Effects: Rapid Change

Another profit challenging effect of fuel costs is rapid change and price volatility. Generally, logistics companies generate fuel surcharges based on the fuel prices of the previous week. When the cost of fuel rises rapidly, there is a lag between the price of fuel and the fuel surcharge rate. This lag has a huge impact on the trucking company’s earnings. However, when the cost of fuel decreases rapidly the opposite is true, and a higher profit is made. Unfortunately the latter occurs much less often.

Fuel costs and their effects are a permanent part of the logistics industry. It makes competition prominent among logistics companies. Everyone wants to have the lowest rates, while still making adequate profit. Direct Drive Logistics promises to bring any and all savings or efficiencies to your attention. We will contain your transportation costs. Direct Drive Logistics is a service partner, NOT a service provider. We are an extension to your company, always keeping your best interests at the forefront.

Contact the third party logistics consultants at Direct Drive Logistics to discuss your freight shipping solutions. Or call us at 414-329-6464 or 1-877-633-5045.