By Mark Montague, DAT Solutions
Cue the limbo music.
The national average retail diesel price is below $2 a gallon for the first time since 2005, according to the Department of Energy's Energy Information Administration (EIA). Based on a weekly survey of 400 truck stops and service centers, the average price hasn't been this low on a non-inflation-adjusted basis since late January 2005, when it was $1.96 a gallon. Compared to just a year ago, the average pump price is down 88.5 cents a gallon.
You’d think truckers would be dancing around and shouting to lower the bar. Why in the world would anyone grouse over such a huge drop in their biggest operating cost after labor?
Here are a few reasons, and they affect the rates that for-hire carriers can charge.
Lower Spot Rates
Roughly 35 to 40 percent of truckload freight is "exception" freight — not under contract — and much of that is priced per transaction using spot market rates. Paid to the carrier by a freight broker or 3PL, these rates are typically 10 to 15 percent lower than the rates that shippers pay to carriers as part of an ongoing contract.
Right now the spread between contract and spot rates is growing, and declining price of fuel is a factor. That’s because spot rates are "all-in" rates: they theoretically combine a line-haul portion and a fuel surcharge. This rolled-up rate has dropped much more sharply than the fuel surcharge has dropped for carriers hauling freight under contract.
Weak Players Survive
Ordinarily, low freight rates and an uncertain economy would starve small and poorly managed
carriers. Yet today’s fuel prices allow many to
Lower fuel costs also allow trucking companies to keep older, less fuel-efficient vehicles on the road. That means more competition — and less bargaining power — for carriers.
Changes in spot market rates typically lead changes in contract rates by three to six months. The line-haul portion of spot market rates has been relatively flat since October, which indicates stability for transportation budgets in the first half of 2016.
Right now there are opportunities for shippers to negotiate favorable long-term contracts with freight brokers/3PLs, who can offer competitive pricing by using mid-sized and smaller fleets. Capacity is abundant and in order for it to stay that way the industry needs healthy truckers across the board, from big for-hire fleets to one-truck owner-operators.
For carriers, the slow season is a time to take advantage of low fuel prices to adjust their networks and routes to better serve their customers. When freight picks up again, they’ll be ready.
Mark Montague is industry rate analyst for DAT Solutions, which operates the DAT® network of load boards and RateView rate-analysis tool. He has applied his expertise to logistics, rates, and routing for more than 30 years. Mark is based in Portland, Ore. For information, visit www.dat.com.