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High fuel prices will hit Iowa businesses


Several times in recent history, we’ve seen gasoline and diesel fuel prices shoot upward only to come down when oil supplies increased to meet demand. However, this time is different and Iowa businesses soon will start feeling the pinch, if they haven’t already.

Many experts are predicting that in spite of already record high prices, burgeoning world demand will continue to drive up the price of oil. Some predict that diesel fuel prices in the United States will rise to perhaps as much as $3 per gallon, a cost that could be passed on in the form of higher prices at both the wholesale and retail levels. A key difference between today’s environment and the energy crises of the 1980s is the emergence of economic powerhouses such as China and India, putting more strain on oil supplies.

The national average price for diesel fuel stood at a record of just under $2.41 per gallon during the week of July 11, up nearly 35 percent from one year ago and 82 percent from two years ago. In real dollars, the U.S. trucking industry spent about $420 million more for fuel during the week of July 11 than it did for the same week a year earlier.

Most trucking firms provide themselves with a safety net for rising fuel prices. Their contracts with shippers generally include fuel surcharge clauses so they can pass along increases. The surcharge is usually based on the Department of Energy diesel fuel price index national average, but the average price varies widely across the country. Trucking firms with significant business in California were paying 11 cents per gallon more than the national average for diesel fuel during the week of July 11.

To further complicate the picture, many shippers are contesting the level of fuel surcharges because of the large impact on their freight bills. The surcharge for the week of July 11 pushed their freight rates 24 percent higher than the base rate level.

Eventually, the cost of fuel will add inflationary pressure to the prices businesses and consumers pay for goods. Truck transportation accounts for about 80 percent of the total cost of shipping freight in the United States and represents about 4.3 percent of the gross domestic product. It’s easy to see how a 35 percent increase in fuel costs during the past year can ripple through other sectors of the economy.

The challenge for the trucking industry and shippers is to come up with new strategies to improve efficiencies over time.

The trucking industry has been proactive in fuel management for several years. However, Environmental Protection Agency standards for truck engine emissions that became effective in 2003 have resulted in a slight reduction in miles per gallon. Even more stringent emission standards are slated to take effect in 2007.

Truck and engine manufacturers are working diligently to develop more fuel-efficient engines and more aerodynamic equipment. Also, several trucking firms are creating incentives and policies to encourage drivers to use fuel more efficiently. These include such details as engine idling policies, engine speed and highway speed guidelines, and bonus pay for fuel efficiency performance. Firms also are modifying fuel purchasing strategies through hedging or volume buying arrangements.

For shippers, the challenges may be even greater. Air freight is more expensive than trucking and just as fuel-intensive. Intermodal railroad service offers a viable option in which truck trailers are hauled by rail over long distances, then picked up by truck carriers for local delivery. However, railroads are running at or near peak capacity.

Michael Crum is associate dean for graduate programs and professor of logistics and supply chain management at the Iowa State University College of Business.

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