In October 2020, the price of diesel fuel was $2.39 a gallon. Fast forward to November 2021, that price has risen to over $3.72. In just a year’s time, the price of diesel fuel has increased by more than 55%, far more than products in many other markets. The sudden increase sent a shockwave throughout the logistics industry, which was already ailing from the impacts of the pandemic. Since then, prices have continued to rise with no sign of letting up. Carriers are increasing rates to keep up with rising costs, shipping prices are increasing, and businesses are left to explain the rising costs to their customers.
The breakdown of diesel fuel costs points to the cause
Why has the price of diesel fuel increased so much over the last year? There are multiple factors, from international economics to new policies, among other factors. When looking at the breakdown of pricing for a single gallon of diesel fuel, the picture becomes a bit clearer. The cost of a gallon of diesel fuel is broken into a few categories; these are the percentages of the cost that make up what we pay in a gallon:
- Crude oil itself: 52%
- The refinement process: 17%
- Distribution and marketing: 16%
- Taxes: 16%
Over the past year, the price of crude oil has increased by 57.65%, rising from $45.11 in December of 2020 to $71.92 in December of 2021. This increase almost perfectly coincides with the total increase in the cost of refined diesel fuel, but there are other factors at play. Imports of fuel have been on the rise since the start of 2020, making the U.S. more reliant on foreign governments and organizations like OPEC (Organization of the Petroleum Exporting Countries). The curbing of natural gas usage also has an impact on the price of diesel fuel. Diesel fuel is the only other source of power that can be substituted for natural gas. When problems arise in that energy sector, organizations begin buying diesel fuel, driving up demand and diesel fuel prices in the industry.
The issues caused by rising diesel fuel costs
The rising cost of diesel fuel can create a ripple effect on costs throughout the entire logistics industry. The increases in fuel prices can cause multiple issues that include:
- Inflation: increased product prices often run down to the end consumer
- Higher transportation costs: carriers must increase their rates in order to offset the costs of fueling vehicles
- A reduction in service areas: some carriers may begin to limit how far they are willing to transport products
- Capacity crunches: fewer carriers will ultimately be available to move freight, which can further exacerbate costs.
Mitigating the issue
Rising fuel prices are one of the most frustrating issues to deal with because shippers, businesses, and carriers have very little control over them. We are solely at the whim of oil companies, international organizations, and government agencies that have either direct control or heavy influence over the price of diesel fuel.
Having said that, there are many things businesses can do to help mitigate the costs of rising diesel fuel prices and keep their supply chains flowing with fewer risks:
- Find the most efficient method of shipping: when full truckloads are not possible, consider the options of PTL and LTL shipping.
- Diversify your shipping methods: are you only shipping via truck? Consider rail, air, or even intermodal shipping based on the products you are moving and where.
Plan routes efficiently: calculate the quickest and most fuel efficient routes for your freight to take, which will cut down on fuel usage.
Work with a SmartWay Partner: 3PLs like King Solutions have a SmartWay Partnership that helps us maintain fuel efficiency and work with carriers who help us with sustainability. This has resulted in cost efficiency for our clients.
We want to talk solutions with your business. Are rising fuel prices a concern for you? Get in touch with us today to talk about how you can become more efficient and mitigate these risks for your business.