By Mark Montague
For the first time since September 2010, the national average retail price for a gallon of diesel fuel is below $3. Retail pump prices, which averaged $3.83 a gallon in 2014, have already hit an average of $2.866 a gallon this year.
No one can say where the price will settle.
All that’s certain is that lower fuel prices are good for truckers. Every 1-cent drop in the average price of diesel equates to an industrywide annual fuel savings of $350 million, according to the American Trucking Associations, aiding an industry that faces rising operating costs and driver wages in particular.
Today’s prices are also a windfall for shippers in the form of lower fuel surcharges.
Everybody wins when the cost of fuel cycles down, right? Well, maybe not everyone. Let’s take a closer look at how lower fuel prices may affect truckload freight markets:
A Blow to Oil Production
With oil prices down by more than half since June 2014, several major oil and gas companies said they will cease new drilling projects after the first quarter. Many smaller companies are busy reworking their 2015 plans.
That’s a big change. Hydraulic fracking helped drive domestic oil production from 5.6 million barrels a day in 2010 to the current rate of more than 9.1 million. As late as November 2014, analysts and energy companies were projecting output to climb by 1 million barrels-plus per year in the foreseeable future.
PacWest Consulting Partners predicts a 12% decline in the number of horizontal oil and natural gas shale wells in the U.S. land market this year and an 8% drop in frack demand overall.
But that was last month. Forecasts are changing every day.
Impact on Trucking
The downturn in oil and gas exploration impacts trucking in several ways.
First, there will be less oil-industry cargo to move, including oilfield service equipment, infrastructure items, and water and frac sand. Second, there will be less competition for truck drivers from the oil and gas sector. For shippers, these factors should combine to free up general truckload capacity this year and potentially exert downward pressure on rates.
Shifting Freight Patterns
Freight patterns are shifting, too.
The slumping energy market is affecting the flow of freight in many oil-producing states like New Mexico, Kansas, North Dakota, Oklahoma, and Louisiana.
Elsewhere, freight continues to move but the types of commodities are changing.
For example, driven by the energy boom, Houston was transformed from a poor cousin to Dallas, in terms of tonnage, into a strong rival. Houston led all markets for spot flatbed freight growth and tonnage in 2014 by a very wide margin. While Houston-outbound flatbed corridors will be quieter this year, van freight is booming along the chemical coast due to the high availability of chemical byproducts.
Flatbed haulers who found so much work moving heavy equipment and materials to the oilfields may shift their focus to steel and auto-related cargo in the Great Lakes as well as some key Southeastern markets. So far this year, Cleveland shows the biggest increase in outbound spot market volume followed by Pittsburgh, Birmingham, and Memphis. All four markets are active in steel production.
Auto sales are increasing, meanwhile, which is positive for the economy. A strong automotive industry boosts flatbed traffic outbound from the Great Lakes region—like Detroit, of course—but also markets in Indiana, Ohio, and Texas as well as some Southeastern states.
As gas prices fall, what will be the sources of freight growth?
The obvious answer is consumer goods. Households will likely spend $750 less on gas this year because of cheaper oil. Consumer spending for goods and services has already grown as a result of declining fuel costs.
Significantly, economists expect a surge in construction and sales of single-family homes. That sector has lagged since the recession, but with the job market recovering, more young people are finally employed and confident enough to apply—and qualify—for mortgages while interest rates are still fairly low.
Already, 2015 is shaping up to be a year of change. As new patterns play out, I’ll keep looking for rate shifts and load-to-truck ratio changes—and I’ll be here to tell you about them.
Mark Montague is manager, industry rates, for DAT Solutions, which operates the DAT® network of load boards. As a mathematician and statistician, he has applied his expertise to logistics, rates, and routing for more than 30 years, and was instrumental in developing DAT’s RateView truckload rates and analysis product. Mark is based in Portland, Ore. For information, visitwww.dat.com.