Trucking
Falling oil prices have the potential to benefit trucking companies significantly in both the short and long term. Tractor-trailers generally run at five to seven miles per gallon. Assuming an oil price of $60 to $80 per barrel, the line-haul cost per container mile is $1.82 for trucks versus $0.37 for rail, according to the U.S. Department of Transportation. Lower oil prices, however, will narrow that relative price gap.
In the short term, operators stand to gain higher margins while passing some of the savings on to customers. For example, National Delivery Systems levies a fuel surcharge on customers that is updated weekly to reflect changes in the national average fuel index. In addition, as noted, reduced fuel costs allow trucking to be more competitive compared with rail. As a result, trucking companies should look to recapture customers they may have previously lost when oil prices were higher. That’s already happening. In fact, according to the Journal of Commerce, a set of U.S. shippers surveyed during the third quarter of 2014 decided to shift freight from intermodal trains to trucks, rather than the reverse, for the first time in five years. Some of the shift was due to rail congestion caused by surging traffic in 2014, but lower diesel prices accelerated the shift, especially among the more frustrated shippers. Trucking companies should seek to further exploit this trend by highlighting the stronger speed/cost trade-off available to customers today.
Lower fuel costs also allow trucking companies to streamline operations around demand, rather than fuel savings. In particular, these companies can adjust their networks and routes to better serve their customers on the basis of speed and convenience. Finally, lower fuel costs could also allow trucking companies to keep older, less fuel efficient vehicles on the road longer (assuming they are compliant with emissions standards—see “Secondary Impacts: LNG”).
Secondary Impacts: LNG
All modes of transportation are being hit with greater emissions regulations, especially involving nitrogen and sulfur oxides (NOx and SOx) and particulates. Transportation companies had been considering liquefied natural gas (LNG) as an alternative to after-treatment technologies with diesel. Until recently, conventional wisdom held that LNG offered both lower particulate levels and (more importantly) lower fuel prices. Based on that thinking, most major railroads and many of the trucking OEMs have developed pilot LNG fuel programs. These programs looked very logical when oil was well over $70 per barrel, but are less attractive as oil prices drop. Transportation companies will need to balance investment in LNG programs if oil prices stay low for the long term.