After years of pandemic-driven port congestion, supply chain bottlenecks and limited freight capacity, the Russian invasion of Ukraine turned what was already a tight fuel market into an energy crisis. The invasion accelerated energy costs, which are now at a record high, triggering major upward fuel price pressure.
While these events are unlikely to resolve soon, shippers can prepare for future repercussions by leveling up their benchmarking practices, evaluating their fuel reimbursement process and exploring alternative modes of transportation.
The State of the International Fuel Market
Shippers across the board have faced increasingly limited freight capacity during the pandemic as they’ve worked to move goods through the supply chain. The Russia–Ukraine War came on the heels of this restricted capacity marketplace, at a time when people had resumed pre-pandemic activities and increased their fuel consumption.
Many countries responded to the invasion by enacting formal economic sanctions and commercial embargoes on Russian-manufactured products, and many individual organizations cut ties with Russian goods and energy suppliers. Because Russia is a massive energy producer, these actions quickly impacted the global economy. With the energy market still recovering from pandemic-era volatility, the halt in Russian energy consumption pushed gasoline and diesel prices over the edge.
In addition to soaring energy costs, shippers’ freight rates have skyrocketed. Typically freight or linehaul rates are negotiated between shippers and carriers that cover the cost of transportation equipment and labor. Due to capacity restrictions, shippers had already been paying higher freight rates. But the subsequent strain on fuel availability prompted carriers to set their prices even higher, prolonging shippers’ cost challenges and ultimately triggering price hikes for consumers.
Repercussions from these geopolitical events, rising inflation and perhaps a looming recession will further complicate the energy market. China’s industrial production has slowed due to COVID-19 lockdowns, and imports to the U.S. have decreased as a result. But as peak summer import season approaches for North America, industrial production may ramp back up. Freight coming to the U.S. will likely accelerate, potentially triggering port congestion on the West Coast and adding to ongoing congestion on the East Coast.
The market is also likely to experience increased demand for gasoline during the summer driving season. Though oil refiners will adjust their capacity to meet this demand, the overall price of crude oil will continue to soar and will push up the price of other fuels refined from it, like diesel. Until gasoline demand subsides or long-term energy supply is adjusted, fuel prices will remain high and shippers will continue paying a premium to move goods.
Three Ways Shippers Can Respond
High transportation costs may continue to plague shippers for the foreseeable future, but they can take action now to optimize their fuel programs and energy supplies ahead of future disruptions.
As you examine your transportation network strategy, here are three ways you can reduce the impact of energy market disruption.
Level up your benchmarking. Use benchmarking to track transportation energy costs and ensure you remain competitive. An advanced benchmarking strategy allows you to analyze market factors that influence price and fuel efficiency in real time. By spotting trends early and pivoting quickly, you can limit the impact of supply chain and transportation disruptions while minimizing fuel consumption.
Create a market-based fuel reimbursement program. Many shippers rely on base-rate surcharge schedules to reimburse carriers for fuel. Although this is a popular model, designing your fuel reimbursement program around a base rate distorts true fuel prices and does not provide accurate rate visibility. Instead, implement a fuel reimbursement program that follows real-time fuel market dynamics. Linehaul and energy costs are subject to change, and they may not move in the same direction. Market-based fuel reimbursement programs account for this movement and foster better transparency in shipper–carrier relationships.
Adopt intermodal carriers. In addition to your energy sources, diversify the modes of transportation that move your goods to significantly lower your network’s energy consumption and cost. If pursuing intermodal freight, prioritize transparent pricing and robust service partnerships to ensure that operational challenges don’t create roadblocks during adoption.
With global crises and disruptions imminent, shippers need robust strategies to reduce their vulnerability to rising fuel prices. Prepare for uncertainty by implementing a market-based fuel reimbursement program, taking advantage of intermodal freight and benchmarking to identify opportunities and risks. You can’t avoid market volatility, but you can navigate it strategically.
Matt Muenster is chief economist at Breakthrough.
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